DENTAL MEDICAL DIAGNOSTIC SYSTEMS INC, SB-2, 1999-04-26

DENTAL MEDICAL DIAGNOSTIC SYSTEMS INC
SB-2, 1999-04-26
DENTAL EQUIPMENT & SUPPLIES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
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<S> <C> <C>
DELAWARE 3843 13-3152648
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

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200 N. WESTLAKE BLVD., SUITE 202
WESTLAKE VILLAGE, CALIFORNIA 91362
(805) 381-2700
(Address and Telephone Number of Principal Executive Offices)
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200 N. WESTLAKE BLVD, SUITE 202
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of Principal Place of Business or Intended Principal Place of Business)
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ROBERT H. GUREVITCH, CHIEF EXECUTIVE OFFICER
200 N. WESTLAKE BLVD., SUITE 202
WESTLAKE VILLAGE, CALIFORNIA 91362
(805) 381-2700
(Name, Address and Telephone Number of Agent for Service)
------------------------------

COPIES TO:

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<S> <C>
Murray
Markiles, Esq. Bruno Laforce
Mark Dancsecs, De Bandt, Van Hecke Lagae Linklaters &
Esq. Alliance
Troop Steuber
Pasich Reddick
& Tobey, LLP Graanmarkt, 2
2029 Century
Park East 2000 ANTRUERPEN
Los Angeles,
California
90067 Belgium
(310) 728-3200 32 3 203 6815
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE

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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 2,000,000 $8.08 $16,160,000 $4,493
</TABLE>

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(1) In the event of a stock split, stock dividend, or similar transaction
involving the Company's Common Stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) on the basis of the average high and low prices of
the Registrant's Common Stock reported on the Nasdaq SmallCap Market on
April 16, 1999.
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION--APRIL 23, 1999

PROSPECTUS

2,000,000 SHARES

DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

COMMON STOCK
------------------

This is an offering of 2,000,000 shares of our common stock. The offering is
made up of a public offering in Belgium and private placements both in and
outside of Belgium, excluding the United States, Canada and Japan. The 2,000,000
shares of common stock are being sold by us.

Our common stock is currently on the Nasdaq Smallcap Market under the symbol
"DMDS" and on the Boston Stock Exchange under the symbol "DMD." We are in the
process of filing applications for admission to trading of all of our shares on
the Nasdaq National Market System under the symbol "DMDS" and on the European
Association of Securities Dealers Automated Quotation System under the symbol
"DMDS."

------------------------

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 7 TO 11.

---------------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
- - Offering price...................................................... $ 7.81 $ 15,620,000
- - Total underwriting fees............................................. $ .55 $ 1,100,000
- - Proceeds to DENTAL/MEDICAL.......................................... $ 7.26 $ 14,520,000
</TABLE>

This table does not include the estimated $100,000 accountable expense
allowance payable to the underwriters.

Bank Brussels Lambert may purchase up to an aggregate total of 200,000
additional shares from us and/or the selling stockholder at the initial public
offering price, less the selling fees, in order to cover over allotments of
shares. The option may be exercised for a period of 30 days from the first day
of trading of our shares on Easdaq. We will not receive any of the proceeds from
any shares of common stock sold by the selling stockholder.

------------------------

The shares of common stock are offered severally by the underwriters,
subject to prior sale and subject to approval of certain legal matters by
counsel of the underwriters and other conditions. The underwriters reserve the
right to withdraw, cancel, or modify its offer and reject orders in whole or in
part. The underwriters expect to deliver the shares against payment at the
offices of the lead underwriter in Brussels on , 1999.

LEAD MANAGER
BANK BRUSSELS LAMBERT

The Date of this prospectus is April 23, 1999
<PAGE>
INSIDE FRONT COVER:

[PICTURES--IN THE UPPER LEFT CORNER IS A WOMAN WITH A LARGE SMILE AND ALSO A
CLOSE UP PICTURE OF TEETH. IN THE UPPER RIGHT CORNER IS A HAND HOLDING A
CONTAINER OF APOLLO SECRET WHITENING GEL. IN THE LOWER LEFT CORNER IS A PICTURE
OF AN APOLLO 95E LAMP. PICTURED IN THE LOWER RIGHT CORNER IS WHITENING POWDER
BEING MIXED.]

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PROSPECTUS SUMMARY

The following is a summary of the more detailed information and financial
statements appearing elsewhere in this prospectus. This summary is not complete
and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus carefully,
including the risk factors and financial statements.

DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

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Our Business........................ We design, develop, assemble and market high
technology dental equipment and related consumables.

Our Products........................ Our best selling product during the 1998 fiscal year
was our tooth curing and whitening lamp known as the
"Apollo 95E." We also market and sell a line of
whitening gels known as "Apollo Secret" for use with
the Apollo 95E, and in the second quarter of 1999 we
intend to introduce a line of composite resin
materials known as "ASAP--Accelerated Solutions for
Aesthetic Procedures," also for use with the Apollo
95E. In addition, we manufacture and sell intraoral
camera systems, known as the "TeliCam II System," and
"TeliCam Elite," and a multi-examination room
intraoral camera system, known as the InTELInet, for
use with the TeliCam II System and TeliCam Elite.

Our Customers....................... Our customers are dentists located in the United
States and internationally. In the United States, the
United Kingdom and Germany, we sell directly to
dentists. In the international marketplace, with the
exception of the United Kingdom and Germany, we sell
our products through independent dealers and
distributors. Our products are not available through
traditional retail channels.

Our Strategy........................ Our mission is to be a leading manufacturer and
distributor of both high technology dental equipment
and related consumables. Key elements of our strategy
are to:

- DELIVER INNOVATIVE PRODUCTS THAT OFFER A STRONG
PRICE VALUE.

- FOCUS ON NEW PRODUCT DEVELOPMENT.

- PURSUE GROWTH THROUGH ACQUISITIONS AND LICENSING
AGREEMENTS.

-CONTINUALLY REFINE STRATEGIES AIMED AT EXPANSION OF
DOMESTIC AND INTERNATIONAL SALES.

Our Principal Offices............... Our principal executive offices are located at 200 N.
Westlake Blvd., Suite 202, Westlake Village, CA 91362.
Our telephone number is (805) 381-2700. We are a
Delaware corporation.
</TABLE>

4
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<S> <C>
THE OFFERING

Shares Outstanding.................. We have approximately 5,435,694 shares of common stock
outstanding.

Shares Offered...................... We are offering 2,000,000 shares of common stock.
There will be a total of approximately 7,435,694
shares of common stock outstanding after this
offering. The underwriters may purchase up to an
aggregate total of 200,000 additional shares of common
stock from us and/or the selling stockholder to cover
any over-allotments.

Proposed Easdaq Symbol.............. "DMDS"

Proposed Nasdaq National Market
System Symbol..................... "DMDS"

Current Nasdaq SmallCap Symbol...... "DMDS"

Use of Proceeds..................... We will use the net proceeds of this offering
primarily for the repayment of debt, to launch a new
line of products incorporating digital x-ray
technology, to finance receivables, inventory,
research and development and for working capital and
general corporate purposes. See "Use of Proceeds" for
a more detailed and complete explanation.

Forward-Looking Statements.......... This prospectus contains statements that we believe
are forward-looking statements within the meaning of
the federal securities laws. These include statements
about our expectations, beliefs, intentions or
strategies for the future, which we indicate by words
or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "the company believes,"
"management believes" and similar language. The
forward-looking statements are based on our current
expectations and are subject to certain risks,
uncertainties and assumptions, including those set
forth in the risk factors and under "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Our actual
results may differ materially from results anticipated
in these forward-looking statements. We base our
forward-looking statements on information currently
available to us, and we assume no obligation to update
them.
</TABLE>

INFORMATION ABOUT FINANCIAL PRESENTATION

OPTIONS AND WARRANTS. Unless this prospectus indicates otherwise, all
information presented in this prospectus assumes no exercise of the
underwriters' over-allotment option, as more fully described under
"Underwriting," no exercise of the redeemable common stock purchase warrants to
purchase 3,850,000 shares of our common stock, no exercise of the warrants to
purchase 450,000 shares of our common stock which were issued in our debt
placement in March 1998 and no exercise of any outstanding options to purchase
common stock.

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SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The table below summarizes certain financial and operating data contained in
the financial statements and elsewhere in this prospectus. You should read the
information set forth below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
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<S> <C> <C>
ACTUAL AS ADJUSTED(1)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 3,941,305 $ 13,241,305
Working capital..................................................................... 6,526,625 16,055,885
Total assets........................................................................ 16,570,360 25,870,360
Current liabilities................................................................. 8,129,239 3,858,499
Long-term debt, less current portion................................................ 252,195 22,935
Total stockholders' equity.......................................................... 8,173,865 21,973,865
</TABLE>

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(1) As adjusted to reflect the sale of the shares offered by us hereby at an
assumed price of $7.81 per share, and the application of the estimated net
proceeds to be received by us therefrom after deducting underwriting fees
and expenses and other expenses. See "Use of Proceeds."

6
<PAGE>
RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
DECIDING TO INVEST, YOU SHOULD READ AND CONSIDER CAREFULLY THE FOLLOWING RISK
FACTORS.

WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR LIKELIHOOD OF
SUCCESS.

We have only manufactured and distributed our TeliCam systems since October
1995 and manufactured and distributed our Apollo 95E since March 1998.
Therefore, we have a limited relevant operating history upon which to evaluate
the likelihood of our success. Factors such as the risks, expenses and
difficulties frequently encountered in the operation and expansion of a
relatively new business and the development and marketing of new products must
be considered in evaluating the likelihood of success of our company.

WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT AND THIS TREND OF LOSSES MAY
CONTINUE IN THE FUTURE.

For the period from October 23, 1995 to March 2, 1996, we incurred a net
loss of $1,625,213. For the fiscal year ended December 31, 1997 we had a net
loss of $2,044,729 and for the fiscal year ended December 31, 1998 we had a net
loss of $1,816,702. At December 31, 1998, our accumulated deficit was
$5,349,493. Our ability to obtain and sustain profitability will depend, in
part, upon the successful marketing of our existing products and the successful
and timely introduction of new products. Although the we were profitable in the
quarters ended December 31, 1998 and March 31, 1999, there can be no assurance
that we will continue to be profitable.

FLUCTUATION IN QUARTERLY RESULTS MAY RESULT IN DECLINES IN OUR STOCK PRICE.

Certain quarterly influences may affect our business. Sales are generally
higher in the fourth quarter due to the purchasing patterns of dentists in the
United States and are generally lower in the first quarter due primarily to the
effect upon demand of increased purchases in the prior quarter. We also expect
to experience lower sales in the summer months as a consequence of holiday
vacations and a lesser number of trade shows. These fluctuations could result in
significant fluctuations, including significant declines in our stock price.

ONE OF OUR PRIMARY PRODUCTS HAS HAD A SIGNIFICANT DECLINE IN SALES AND IF THIS
DECLINE CONTINUES WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY.

The TeliCam systems, together with related products such as the InTELInet
system, and the Apollo 95E have been our primary products and during the last
fiscal year have made up a substantial portion of our revenue. We believe that
the market for intraoral cameras, such as the TeliCam systems, is a market that
has declined. TeliCam systems sales have recently been below levels of prior
comparable periods, a trend that we expect to continue.

AS A RESULT OF THE DECLINE IN SALES OF THE TELICAM, OUR FUTURE DEPENDS ON OUR
ABILITY TO INCREASE DEMAND FOR OUR APOLLO 95E AND RELATED PRODUCTS AS WELL AS
OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.

As a result of the decline in the intraoral camera market, our future
depends upon our ability to increase demand for our Apollo 95E and related
products and our ability to develop and successfully introduce new products to
make up for the diminished sales of the TeliCam systems. Development of new
product lines is risk intensive and often requires:

- long-term forecasting of market trends;

- the development and implementation of new designs;

- compliance with extensive governmental regulatory requirements; and

- a substantial capital commitment.

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Also, the medical and dental device industry is characterized by rapid
technological change. As technological changes occur in the marketplace, we may
have to modify our products in order to become or remain competitive or ensure
that our products do not become obsolete. If we fail to anticipate or respond in
a cost-effective and timely manner to government requirements, market trends or
customer requirements, or if there are any significant delays in product
development or introduction, this could have a material adverse effect on our
business.

WE SUBSTANTIALLY DEPEND UPON THIRD PARTY DEVELOPMENT AGREEMENTS AND LICENSING
AGREEMENTS FOR THE DEVELOPMENT OF MANY OF OUR PRODUCTS AND THE LICENSING OF
TECHNOLOGY OWNED BY OTHERS FOR USE IN OUR PRODUCTS AND IF THESE THIRD PARTIES
ARE UNABLE TO DELIVER WE MAY BE FORCED TO LIMIT OUR OPERATIONS.

We are dependent upon third party developers and suppliers for the
development and manufacture of all of the components we use at our domestic and
French facilities in assembling our dental equipment and for the development and
manufacture of our consumable products. Outside of updating our current
products, we do not develop any of our own technology; rather, we continually
seek out third parties that own new and innovative technology that they may be
willing to license to us or develop into new dental products under a development
agreement. We have had problems in the past obtaining a marketable product from
companies with whom we had entered into a licensing arrangement. We entered into
a licensing arrangement with Ion Laser Technology under which ILT was unable to
develop a product in accordance with the delivery schedule established by our
agreement that met our specifications; as a result, we were forced to find an
alternative product from that which we had contracted for with ILT.

Under licensing and development arrangements we have obtained exclusive
marketing rights to products for the dental market incorporating certain digital
x-ray technology developed by Suni Microsystems Imaging, Inc. We have paid
significant non-refundable advances to, and are dependent upon Suni to
successfully develop the digital x-ray technology and to commercialize the
digital x-ray technology. We do not guarantee that Suni will be successful in
this endeavor. If Suni should not develop a digital x-ray product which is
accepted in the marketplace, and has sufficient sales to achieve profits, this
could have a material adverse effect on our future prospects.

IF WE DO NOT MAKE CERTAIN REQUIRED MINIMUM ROYALTY PAYMENTS TO SUNI, WE WILL
LOSE OUR EXCLUSIVE RIGHTS TO THE DIGITAL X-RAY TECHNOLOGY DEVELOPED FOR US BY
SUNI.

In order to maintain our rights to be the exclusive dental licensee of the
digital x-ray technology developed by Suni, our agreement with Suni requires us
to make minimum royalty payments. The royalty payments begin coming due when
products incorporating the developed technology are introduced into the market.
We cannot guarantee that we will be able to make the minimum royalty payments
required to maintain our rights to be the exclusive distributor. If we do not
make the required royalty payments, Suni will be able to license the developed
technology to our competitors, or grant a non-exclusive license to a competitor,
which could have a material adverse effect on our future prospects.

THE GOVERNMENT EXTENSIVELY REGULATES OUR PRODUCTS AND FAILURE TO COMPLY WITH
APPLICABLE REGULATIONS COULD RESULT IN FINES, SUSPENSIONS, SEIZURE ACTIONS,
PRODUCT RECALLS, INJUNCTIONS AND CRIMINAL PROSECUTIONS.

The United States Food and Drug Administration, as well as state and foreign
agencies, regulate almost all aspects of our medical devices including:

- entry into the marketplace;

- design;

- testing;

- manufacturing procedures;

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- reporting of complaints;

- labeling; and

- promotional activities.

Under the Federal Food, Drug, and Cosmetic Act, the FDA has the authority to
control the introduction of new products into the United States marketplace.
Unless specifically exempted by the agency, medical devices enter the
marketplace through either FDA clearance of a premarket approval application or
FDA approval of an application for 510k clearance. The FDA conducts periodic
inspections to assure compliance with that agency's regulations.

Unless specifically exempted by FDA's regulations, we will need to file a
510k submission or premarket approval application for any new products developed
in the future including any using digital x-ray technology. The process of
obtaining a clearance or approval can be time-consuming and expensive.
Compliance with the FDA's regulatory requirements can be burdensome. We do not
guarantee that the required regulatory approvals or clearances will be obtained.
Any approval or clearance obtained from the FDA may include significant
limitations on the use of the medical device which is the subject of the
approval or clearance. We cannot market a medical device if required FDA
approval or clearance is not granted. Inability to obtain such approval or
clearance could result in a delay or suspension of the manufacture and sale of
affected medical devices. Any such delay or suspension would have a material
adverse effect on our business. In addition, changes in existing regulations or
the adoption of new regulations could make regulatory compliance by us more
difficult in the future. The failure to obtain the required regulatory
clearances or to comply with applicable regulations could result in one or more
of the following:

- fines;

- delays or suspensions of device clearances;

- seizure actions;

- mandatory recalls;

- injunction action; and

- criminal prosecution.

WE ARE WAITING FOR A CALIFORNIA MEDICAL DEVICE MANUFACTURING LICENSE AND IF WE
FAIL TO RECEIVE THIS LICENSE WE MAY BE FORCED TO DELAY OR SUSPEND THE
MANUFACTURE AND SALE OF OUR PRODUCTS.

The State of California requires that each facility manufacturing a medical
device apply for and obtain from the State's Department of Health Services a
Medical Device Manufacturing License. To qualify for the license, a facility
must be in compliance with FDA's regulatory requirements. We filed a timely
application for this license and in early March of 1999 the DHS conducted an
inspection of our manufacturing facility in Irvine, California and found no
"reportable observations." We received a list of adjustments and clarifications
recommended by the DHS. We filed a response to this list on March 19, 1999 and
we expect to receive a California Medical Device Manufacturing License in early
May of 1999. We cannot guarantee that DHS will grant our license. We cannot
manufacture devices at our facility if the license is not granted. Inability to
obtain this license could result in a delay or suspension of the manufacture and
sale of our medical devices. Any such delay or suspension would have a material
adverse effect on our business.

THE LOSS OF OUR CHIEF EXECUTIVE OFFICER COULD LEAD TO THE LOSS OF A SIGNIFICANT
PORTION OF OUR BUSINESS BECAUSE OF HIS PERSONAL CONTACTS IN OUR INDUSTRY.

Our success is highly dependent upon our Chairman of the Board and Chief
Executive Officer, Robert H. Gurevitch. Unlike larger companies, we rely heavily
on a small number of officers to conduct a large portion of our business. The
loss of service of Robert H. Gurevitch along with the loss of his numerous
contacts and relationships in the industry would have a material adverse effect
on our

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business. We have entered into an employment agreement with Robert H. Gurevitch
under which he has agreed to render services to us until October 1, 1999. We
have obtained "key person" life insurance on Mr. Gurevitch in the amount of
$2,000,000, of which we are the sole beneficiary, but there can be no assurance
that the proceeds of such insurance will be sufficient to offset the loss to us
in the event of his death.

OUR PRODUCTS HAVE VERY LIMITED PATENT PROTECTION, AND THEREFORE, THEY MAY NOT BE
ADEQUATELY PROTECTED FROM COPYING BY COMPETITORS.

Our future success and ability to compete is dependent in part upon our
proprietary technology used in the Apollo 95E. The Apollo 95E is currently only
protected by a patent in France. Patent protection is being sought in all of the
countries of the world in which this technology can be marketed. There can be no
assurance that patents outside of France will be granted for the Apollo 95E
system, and if granted, the patents will provide adequate protection for our
technologies. Consequently, we rely primarily on trademark, trade secret and
copyright laws to protect our technology. However, there can be no assurance
that third parties will not try to copy our products. In addition, many foreign
countries' laws may not protect us from improper use of our proprietary
technology overseas. We may not have adequate remedies if our proprietary rights
are breached and therefore a breach of our proprietary rights could have a
material adverse effect on our financial condition.

ISSUANCE OF PREFERRED STOCK MAY HAVE THE EFFECT OF PREVENTING A CHANGE OF
CONTROL.

We have authorized 1,000,000 shares of preferred stock, which may be issued
by our Board of Directors with certain rights not granted to the holders of
common stock. Issuance of such preferred stock, depending upon the terms and the
rights thereof, may have the effect of delaying, deterring or preventing a
change in control.

WE ARE SUSCEPTIBLE TO PRODUCT LIABILITY SUITS AND IF A LAWSUIT IS BROUGHT
AGAINST US IT COULD RESULT IN US HAVING TO PAY LARGE LEGAL EXPENSES AND/OR
JUDGMENTS.

Although we have not yet had any product liability claims, because of the
nature of the medical/ dental device industry, there can be no assurance that we
will not be subject to such claims in the future. Our products come into contact
with more vulnerable areas of the human body, such as the mouth, tongue, teeth
and gums, and, therefore, the sale and support of dental products makes us
susceptible to the risk of such claims. A successful product liability claim or
claim arising as a result of use of our products brought against us, or the
negative publicity brought up by such claim, could have a material adverse
effect upon our business. We maintain product liability insurance with coverage
limits of $1,000,000 per occurrence and $11,000,000 per year. While we believe
that we maintain adequate insurance coverage, we do not guarantee that the
amount of insurance will be adequate to satisfy claims made against us in the
future, or that we will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts.

THE YEAR 2000 ISSUE COULD HAVE AN IMPACT ON OUR INFORMATION TECHNOLOGY AND
NON-INFORMATION TECHNOLOGY SYSTEMS AS WELL AS THOSE OF OUR SUPPLIERS AND/OR
CUSTOMERS, ANY OF WHICH COULD NEGATIVELY AFFECT SALES OF OUR PRODUCTS.

The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information or system failures. Estimates of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, our
management is continuing to actively analyze, assess and plan for various Year
2000 issues across our businesses.

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information technology systems for Year 2000 readiness. All of our
non-information technology systems are Year 2000 compliant. With respect to
information technology systems, our strategy is to replace all non-Year 2000
compliant information technology systems by June 30, 1999. As of April 15, 1999,
our in-house data network is Year 2000 compliant. Also as of April 15, 1999,
eighty percent of our workstations are Year 2000 compliant, with the remainder
to be replaced with Year 2000 compliant workstations by June 30, 1999. Although
our management believes that its efforts will be successful and the costs will
be immaterial to our consolidated financial position and results of operations,
it also recognizes that any failure or delay could cause a potential impact.

The Year 2000 readiness of our customers varies. We are not investigating
whether or not our customers are evaluating and/or preparing their own systems
to be Year 2000 compliant. These efforts by customers to address Year 2000
issues may affect the demand for certain products and services; however, the
impact on our revenue is highly uncertain.

We have investigated the Year 2000 readiness of our key suppliers. Our
direction of this effort is to ensure that there are adequate resources and
supplies available to us to minimize any potential business interruptions. Our
assessment of our key suppliers is now complete and we have determined that our
policy of maintaining an inventory of components and supplies sufficient to last
a minimum of one to three months will be adequate to minimize almost any
potential business interruptions. We believe that our one to three month
inventories will allow enough time for our suppliers to remedy Year 2000
problems that may arise in their respective businesses.

The Year 2000 issue presents a number of other risks and uncertainties that
could impact us, such as public utilities failures, potential claims against us
for damages arising from products and services that are not Year 2000 compliant,
and the response ability of certain government commissions of the various
geographic areas where Dental/Medical conducts business. While we continue to
believe the Year 2000 issues described above will not materially affect our
financial position, it remains uncertain as to what extent, if any, we may be
impacted.

If we, our customers or suppliers are unable to resolve any Year 2000
compliance problems in a timely manner, we could face business interruptions or
a shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. We anticipate that all of our internal systems will be Year 2000
compliant by June 30, 1999 and that we will have adequate components and
supplies available to us to minimize any potential business interruptions that
may result from Year 2000 compliance problems suffered by our suppliers. As a
result, we have determined that we will not be developing any contingency plans
that address a reasonably likely worst case scenario.

THE EASDAQ MARKET HAS A LIMITED OPERATING HISTORY CHARACTERIZED BY HIGH
VOLATILITY.

We have applied for admission to trading of our shares on Easdaq to commence
trading on Easdaq upon the completion of this offering. Easdaq has a limited
operating history and is characterized by high volatility. We cannot guarantee
that Easdaq will develop into a stable and liquid market for securities or that
price fluctuations on the Easdaq will not have a negative impact on the market
price of our shares. We cannot guarantee that any market for our shares will
develop or be sustained. We cannot predict the effect, if any, that future sales
of our shares, or the availability of our shares for future sale, will have on
the market price of our shares.

THE PRICE OF THE SHARES OFFERED UNDER THIS PROSPECTUS MAY NOT REFLECT FUTURE
MARKET PRICE.

The offering price of the shares under this prospectus will be determined
pursuant to a bookbuilding procedure and may not be indicative of market prices
that will prevail in the future.

CURRENCY FLUCTUATIONS COULD HAVE A NEGATIVE IMPACT ON OUR RESULTS.

Our reporting currency is the US dollar. However, a growing part of our
revenues will be realised in Euro's. The volatility of the exchange rate of the
US Dollar against the Euro could have a negative impact on our financial
position and results of operations.

11
<PAGE>
USE OF PROCEEDS

Our net proceeds from the sale of the 2,000,000 shares (at an assumed price
of $7.81 per share), after deducting underwriting fees, estimated underwriting
expense allowance and estimated offering expenses, are estimated to be
approximately $13,800,000 ($15,296,396 if the over-allotment option is exercised
in full solely from us).

We expect to use the net proceeds from this offering in the manner and
approximate amounts indicated below. The uses specified are listed in order of
their priority.

<TABLE>
<S> <C>
Launch of the digital x-ray(1)................................. $1,500,000
Repayment of bank debt(2)...................................... 4,500,000
Finance receivables............................................ 1,000,000
Finance inventory.............................................. 1,500,000
Research and development....................................... 2,000,000
Working capital and general corporate purposes................. 3,300,000
----------
Total net proceeds........................................... $13,800,000
----------
----------
</TABLE>

- ------------------------

(1) During fiscal 1999, we intend to introduce our digital x-ray system
incorporating the digital x-ray technology developed by Suni Microsystems
Imaging, Inc.

(2) Consists of debt incurred under our $6.95 million credit facility with
Imperial Bank. See Note 10 of "Notes to Consolidated Financial Statements"
for additional information about our credit facility with Imperial Bank.

We have a $6,950,000 credit facility with Imperial Bank. As of April 15, we
had an outstanding balance under the credit facility of $5,150,065. Borrowings
under the facility bear interest at rates ranging from 6.9% to 8.5%. The credit
facility is comprised of a $2,500,000 fixed 6.9% rate non-revolving line of
credit due May 31, 2000; a $4,000,000 variable rate of 2.5% over LIBOR revolving
line of credit loan due May 31, 2000; and a $450,000 variable interest rate loan
repayable in 16 monthly installments. Our obligations under the credit facility
are secured with all of our assets.

We may use a portion of the proceeds allocated for working capital and
general corporate purposes to acquire technology or enter into strategic
alliances with other companies. We have no current agreements, commitments or
arrangements with respect to any proposed acquisition, joint venture or
strategic alliance, and we do not guarantee that any acquisitions, joint
ventures or strategic alliances will be made or entered into in the future. We
believe that the net proceeds from this offering, together with our existing
cash and cash equivalents and funds generated from operations, will be
sufficient to meet our cash requirements for at least the next 12 months.

Pending application of the net proceeds, we intend to invest the net
proceeds of this offering in short-term, investment-grade interest-bearing
investments or accounts.

We intend to maintain flexibility with respect to the use of the proceeds of
this offering and the amounts actually expended for each such use are at our
discretion and may vary significantly depending upon a number of factors,
including the progress of our marketing programs, capital spending requirements,
and developments in the dental device industry. Accordingly, management reserves
the right to reallocate the proceeds of this offering as it deems appropriate.

12
<PAGE>
PRICE RANGE OF COMMON STOCK AND WARRANTS

Common stock and redeemable common stock purchase warrants are currently
traded on the Nasdaq SmallCap Market under the symbols "DMDS" and "DMDSW,"
respectively, and on the Boston Stock Exchange under the symbols "DMD" and
"DMDW," respectively. Prior to May 9, 1997, our common stock was quoted on the
OTC Bulletin Board. The following table sets forth, for the periods indicated,
the range of the high and low closing prices of the common stock on the OTC
Bulletin Board and the Nasdaq SmallCap Market as reported by Nasdaq Trading and
Market Services. These quotations reflect inter-dealer prices, without mark-up,
mark-down or commission, and may not represent actual transactions.

<TABLE>
<CAPTION>
REDEEMABLE
COMMON STOCK
PURCHASE
COMMON STOCK WARRANTS
-------------------- --------------------
<S> <C> <C> <C> <C>
PERIOD ENDED HIGH LOW HIGH LOW
- ------------------------------------------------------------ --------- --------- --------- ---------
March 31, 1997.............................................. $ 4.80 $ 3.10 $ -- $ --
June 30, 1997............................................... 7.10 4.10 3.90 3.70
September 30, 1997.......................................... 6.60 5.40 2.70 2.50
December 31, 1997........................................... 9.50 5.90 4.00 3.80

March 31, 1998.............................................. 8.00 5.88 4.00 2.69
June 30, 1998............................................... 7.50 4.00 3.50 1.50
September 30, 1998.......................................... 5.50 3.63 2.13 1.13
December 31, 1998........................................... 6.75 4.00 2.88 1.38

March 31, 1999.............................................. 8.56 5.81 3.62 3.62
</TABLE>

On April 15, 1999, the high bid and low ask prices were $8.63 and $8.13,
respectively for our common stock and $3.75 and $3.63, respectively, for our
redeemable common stock purchase warrants. As of March 31, 1999, there were
approximately 50 stockholders of record and approximately 994 beneficial holders
of our common stock, and 24 holders of record and approximately 361 beneficial
holders of our redeemable common stock purchase warrants.

DIVIDEND POLICY

We have not paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Our bank financing agreement imposes restrictions on any payment of
dividends. We believe that all our earnings, if any, should be retained for the
development of our business.

13
<PAGE>
CAPITALIZATION

The following table sets forth our short-term debt and capitalization as of
December 31, 1998, and as adjusted as of that date to give effect to our sale of
2,000,000 shares of our common stock at an assumed offering price of $7.81 per
share and our application of the estimated net proceeds after deducting
underwriting fees, estimated underwriting expense allowance and estimated
offering expenses payable by us. The information in the table should be read in
conjunction with the more detailed consolidation financial statements and notes
included elsewhere in this prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED
------------- -------------
SHORT-TERM DEBT:
Short term borrowings............................................................ $ 4,414,575 $ 143,835
LONG-TERM DEBT:
Long-term debt, less current portion............................................. $ 252,195 $ 22,935
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued
and outstanding................................................................ -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 5,255,694 shares
issued and outstanding; 7,255,694 shares issued and outstanding, as adjusted... 52,556 72,556
Additional paid-in capital....................................................... 13,469,597 27,249,597
Accumulated translation adjustment............................................... 1,205 1,205
Accumulated deficit.............................................................. (5,349,493) (5,349,493)
------------- -------------
Total stockholders' equity................................................... 8,173,865 21,973,865
------------- -------------
Total capitalization......................................................... $ 12,840,635 $ 22,140,635
------------- -------------
------------- -------------
</TABLE>

- ------------------------

14
<PAGE>
DILUTION

Purchasers of the common stock in this offering will experience an immediate
and substantial dilution in the net tangible book value of the common stock from
the offering price. The net tangible book value of our common stock as of
December 31, 1998, was $7,375,428 or $1.40 per share. Actual net tangible book
value per share represents the amount of total actual tangible assets less total
actual liabilities, divided by the shares of common stock outstanding as of
December 31, 1998. After giving effect to the sale of 2,000,000 shares of common
stock offered by us in this offering and the receipt and the application of the
estimated net proceeds therefrom (at an assumed public offering price of $7.81
per share, after deducting the underwriting fees and estimated offering
expenses), our adjusted net tangible book value as of December 31, 1998 would
have been approximately $21,175,428 or $2.92 per share. This represents an
immediate increase in as adjusted net tangible book value of $1.52 per share to
our current stockholders and an immediate and substantial dilution of $4.89 per
share to new stockholders purchasing shares in this offering. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price................................ $ 7.81
Actual net tangible book value per share as of December 31,
1998..................................................... $ 1.40
Increase attributable to new stockholders.................. 1.52
---------
As adjusted net tangible book value per share after this
offering................................................... 2.92
---------
Dilution per share to new stockholders....................... $ 4.89
---------
---------
</TABLE>

The following table sets forth, at December 31, 1998, the difference between
the number of shares of common stock purchased, the total consideration paid and
the average price per share paid by the existing stockholders and the new
investors purchasing shares of common stock in this offering.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. 5,255,694 72.4% $ 13,522,153 46.4% $ 2.57
New investors......................................... 2,000,000 27.6 15,620,000 53.6 $ 7.81
---------- ----- ------------- -----
7,255,694 100.0% $ 29,142,153 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>

The foregoing tables and calculations assume no exercise of any outstanding
options or warrants. At December 31, 1998, 891,806 shares of common stock were
subject to outstanding options at a weighted average exercise price of $4.15 per
share and 4,300,000 shares of common stock were subject to outstanding warrants,
with a weighted average exercise price of $5.11 per share. To the extent options
or warrants are exercised, there will be further dilution to new investors.

15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the
periods indicated. The consolidated statement of operations data set forth below
with respect to the years ended December 31, 1998 and 1997, and the balance
sheet data as of December 31, 1998 are derived from our audited financial
statements and the notes thereto included elsewhere in this prospectus. You
should read the following in conjunction with our financial statements and
related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................................... $ 16,087,208 $ 19,227,798
Cost of sales.................................................. 10,234,206 9,820,882
------------- -------------
Gross profit................................................... 5,853,002 9,406,916
Operating expenses............................................. 7,501,082 9,314,214
------------- -------------
Operating income (loss)........................................ (1,648,080) 92,702
Interest and other income...................................... (205,818) (195,532)
Interest expense............................................... 138,576 1,739,693
Amortization of debt issuance costs............................ 76,431 235,484
------------- -------------
Loss before income taxes and extraordinary item................ (1,657,269) (1,686,943)
Provision for income taxes..................................... 153,311 129,759
------------- -------------
Loss before extraordinary item................................. (1,810,580) (1,816,702)
Extraordinary loss on early extinguishment of debt............. (234,149) --
------------- -------------
Net loss....................................................... $ (2,044,729) $ (1,816,702)
------------- -------------
------------- -------------
Net loss per share--diluted.................................... $ (.47) $ (.35)
------------- -------------
------------- -------------
Weighted average number of shares used in computing per share
amounts...................................................... 4,341,948 5,151,614
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31,
1998
---------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 3,941,305
Working capital.............................................................. 6,526,625
Total assets................................................................. 16,570,360
Current liabilities.......................................................... 8,129,239
Long-term debt, less current portion......................................... 252,195
Total shareholders' equity................................................... 8,173,865
</TABLE>

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED ELSEWHERE IN
THIS PROSPECTUS.

INTRODUCTION

We design, develop, manufacture and sell high technology dental equipment
and related consumables. Our highest grossing product for the 1998 fiscal year
was the tooth curing and whitening device known as the "Apollo 95E." We also
market and sell a line of whitening gels known as "Apollo Secret" for use in
conjunction with the Apollo 95E, and in the second quarter of 1999 intend to
introduce a line of composite resin materials known as "ASAP--Accelerated
Solutions for Aesthetic Procedures," also for use in conjunction with the Apollo
95E. In addition, we continue to manufacture and sell intraoral camera systems,
known as the "TeliCam II System," and "TeliCam Elite," and a multi-examination
room intraoral camera system, known as the InTELInet, for use in connection with
the TeliCam II System and TeliCam Elite.

From early 1996 to mid 1998, we were primarily involved in designing,
developing, manufacturing, and marketing intra-oral camera systems referred to
as "TeliCam Systems". The first shipments to customers of the TeliCam System
commenced in early February 1996.

On October 2, 1997, we purchased the assets of Societe D' Exploitation
Dentaire, a company organized under the laws of France. Among the acquired
assets was a patent for S.E.D.'s "Biotron" curing and whitening device
technology. From this technology, we developed the "Apollo 95E" a unique,
visible-light curing instrument which is designed for two different
applications: the hardening of tooth-colored dental composite materials in three
seconds or less and for single appointment, in-office tooth whitening in less
than forty minutes. This safe plasma-arc lamp uses a high-frequency electrical
field to generate plasma energy, which is ideal for the fast-curing (hardening)
of photosensitive composites. The Apollo 95E also produces light and heat which,
when used in conjunction with the Apollo Secret whitening gel, activates the
whitening chemicals in the Apollo Secret. The result of this activation is
dramatic whitening of discolored teeth. The rapid performance of the Apollo 95E
in both hardening composite materials and whitening teeth can enable an average
dental practice to save about 5 to 8 hours per month of a dentist's examination
time.

The Apollo 95E, which was introduced into markets outside of the US and
Canada in March 1998 and into the US and Canada in August 1998, accounted for
over $11 million in revenues in 1998. However, revenues attributed to the
TeliCam intraoral cameras declined significantly for fiscal year 1998 as
compared to 1997 and therefore our net sales were limited to an increase of 19%
from 1997 to 1998. While we expect that the trend of increasing revenues each
fiscal quarter attributable to the Apollo 95E will continue for the near future,
we also expect the trend in the decline in sales of the TeliCam intraoral
cameras will also continue and therefore, to at least, partially offset the
increased revenues realized on the Apollo 95E.

RESULTS OF OPERATIONS

We derive our revenues primarily from the sale of three product lines:
TeliCam intraoral camera systems, Apollo 95E curing and whitening devices, and
Apollo Secret tooth whitening gels for use in conjunction with the Apollo 95E,
which began shipping in the fourth quarter of 1998. Through December 31, 1998,
revenues from Apollo Secret have been immaterial.

17
<PAGE>
Revenues by product line, for the fiscal years ended December 31, 1998 and
1997, are reflected in the following table:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
<S> <C> <C> <C> <C>
1997 % 1998 %
------------- --- ------------- ---
Apollo 95E........................................ $ -- --% $ 11,125,629 58%
TeliCam........................................... 15,367,806 96% 6,555,540 34%
Other............................................. 719,402 4% 1,546,629 8%
------------- --- ------------- ---
$ 16,087,208 100% $ 19,227,798 100%
------------- --- ------------- ---
------------- --- ------------- ---
</TABLE>

NET SALES. Net sales for the fiscal years ended December 31, 1998 and 1997,
were $19,227,798 and $16,087,208, respectively.

Net sales for the fiscal year ended December 31, 1998 increased
approximately 19% from the prior year. Sales are comprised primarily of the
Apollo 95E and TeliCam Systems. The increase in sales for the fiscal year ended
December 31, 1998 was primarily due to the introduction and sales of
approximately $11,100,000 of the Apollo 95E, which began shipping in Europe
during the first quarter of 1998 and in the United States during the third
quarter of 1998, offset by a reduction of approximately $8,800,000 in TeliCam
sales both domestically and internationally resulting from weaker demand and
increased competition as the market for intraoral cameras became saturated. We
expect the decline in TeliCam sales to continue into the future. No assurance
can be given that the Apollo 95E sales will ultimately offset the reduced
TeliCam sales in the future. See "Risk Factors--As a result of the decline in
sales of the TeliCam, our future depends on our ability to increase demand for
our Apollo 95E and related products as well as our ability to develop and
introduce new products."

COST OF SALES. Cost of sales for the fiscal years ended December 31, 1998
and December 31, 1997, were $9,820,882, or 51% of net sales, and $10,234,206, or
64% of net sales, respectively. Cost of sales, both on an absolute dollar basis
and as a percentage of net sales, decreased from 1997 to 1998 primarily due to
more favorable margins on the Apollo 95E, which represented 58% of net sales for
the year. While the more favorable margins on the Apollo 95E have helped to
decrease the cost of sales as a percentage of net sales, we expect that the
margins on the sale of the TeliCams will continue to shrink, and thus the cost
of sales of the TeliCams as a percentage of TeliCam net sales will increase in
the future.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $8,764,910, or 46% of net sales and $6,031,066,
or 37% of net sales, for the fiscal years ended December 31, 1998 and 1997,
respectively. The absolute dollar increases in this expense category from year
to year are primarily attributed to a combination of increased sales commissions
resulting from increased sales volumes, increased salaries and legal expenses
associated with our growth, and increased marketing costs resulting from
enhanced marketing efforts. The increase in selling, general and administrative
expenses as a percentage of net sales from 1997 to 1998 can be attributed to the
cost of expanding our work force in anticipation of future growth. These
expenses are expected to continue to increase on an absolute dollar basis as
sales volumes increase and additional marketing costs are incurred for the
introduction of the new products.

RESEARCH AND DEVELOPMENT. Research and development expenses totaled
$549,304, or 3% of net sales and $1,213,766, or 8% of net sales, for the fiscal
years ended December 31, 1998 and 1997, respectively. The decrease in research
and development expenses for fiscal 1998, both on an absolute dollar basis and
as a percentage of net sales, is primarily attributed to $875,000 of fees paid
to Suni Imaging Microsystems, Inc. to fund the development of the digital x-ray
technology for incorporation into systems for the dental market during the
fiscal year ended December 31, 1997. We expect research and development expenses
to increase in future periods, as we continue to pursue the development of

18
<PAGE>
new technologies. See "Risk Factors--As a result of the decline in sales of the
TeliCam, our future depends on our ability to develop and introduce new
products."

INTEREST INCOME. Interest income totaled $195,532 and $205,818 for fiscal
years ended December 31, 1998 and 1997. This income is attributable to the
interest earned by investing the net proceeds of both the May 1997 secondary
offering and the March 1998 debt placement in a short-term management account
through Comerica Securities.

INTEREST EXPENSE. Interest expense totaled $1,739,693 and $138,576 for
fiscal years ended December 31, 1998 and 1997, respectively. This expense
category includes interest paid on capital lease obligations, on bridge notes,
on notes payable to related parties, and on the senior subordinated notes. The
substantial increase in fiscal 1998 is primarily due to the accrued interest and
the amortization of the debt discount on $4.5 million of senior subordinated
notes, which were repaid in January 1999 with proceeds from our new credit
facility with Imperial Bank.

Amortization of debt issuance costs totaled $235,484 and $76,431 for fiscal
years ended December 31, 1998 and 1997, respectively. This represents the
amortization of the issuance costs incurred in connection with the bridge notes
issued in November 1996 and the 12% senior subordinated notes issued in March
1998. These costs were amortized over the term of the notes. We repaid the
bridge notes out of the proceeds of the May 1997 secondary offering. In
addition, the senior subordinated notes were repaid in January 1999 out of the
proceeds of our new credit facility with Imperial Bank.

NET LOSS. Net loss for the fiscal year ended December 31, 1998 totaled
$1,816,702, or $0.35 per share. Net loss for the fiscal year ended December 31,
1997 totaled $2,044,729, or $0.47 per share.

RECENT RESULTS OF OPERATIONS

Set forth below are selected consolidated statements of operations data for
the three month periods ended March 31, 1998 and 1999. While this information is
derived from unaudited financial statements, in our opinion, all adjustments
necessary for a fair presentation of results for such periods have been
included. The results of operations for the three months ended March 31, 1998
and 1999 are not necessarily indicative of the results to be expected for the
full year.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
---------------------------
<S> <C> <C>
1998 1999
------------ -------------
Total sales....................................................................... $ 2,110,531 $ 10,214,485
Cost of sales..................................................................... 1,550,089 4,912,476
------------ -------------
Gross profit.................................................................... 560,442 5,302,009
Selling, general and administrative expense....................................... 1,729,619 3,454,598
Research and development expense.................................................. 142,387 142,580
------------ -------------
Operating income (loss)......................................................... (1,311,564) 1,704,831
Interest and other income......................................................... (44,273) (31,558)
Interest expense.................................................................. 83,793 441,016
Amortization of debt issuance costs............................................... 10,484 64,516
------------ -------------
Income (loss) before income taxes............................................... (1,361,568) 1,230,857
Provision for income taxes........................................................ -- 71,080
------------ -------------
Net (loss) income............................................................... $ (1,361,568) $ 1,159,777
------------ -------------
------------ -------------
Earnings (loss) per share
Basic........................................................................... $ (0.27) $ 0.22
Diluted......................................................................... (0.27) 0.17
Weighted average number of shares
Basic........................................................................... 5,115,777 5,321,027
Diluted......................................................................... 5,115,777 7,026,970
</TABLE>

19
<PAGE>
Net sales increased from $2,110,531 for the three months ended March 31,
1998 to $10,214,485 for the three months ended March 31, 1999. The increase for
the three months ended March 31, 1999 was primarily attributable to the
introduction of the Apollo 95E, which began shipping in Europe during the first
quarter 1998 and in the United States during the third quarter 1998. Cost of
sales for the three months ended March 31, 1998 and 1999 were $1,550,089 or 73%
of net sales, and 4,912,476 or 48% of net sales, respectively. Cost of sales, as
a percentage of net sales, decreased from the three months ended March 31, 1998
primarily due to the more favorable margins on the Apollo 95E, which represented
84% of net sales for the three months ended March 31, 1999 and for which there
were no sales for the three months ended March 31, 1998.

CAPITAL RESOURCES AND LIQUIDITY

For the fiscal year ended December 31, 1998, we used net cash of $3,781,610
in operations. Accounts receivable increased from $1,967,614 at December 31,
1997 to $3,757,865 at December 31, 1998, primarily as a result of the increase
in sales of the Apollo 95E in the fourth quarter. Despite the increase in
accounts receivable, our allowance for doubtful accounts remained unchanged due
to our ability to collect substantially all of our receivables. See "Risk
Factors--Fluctuation in quarterly results may result in declines in our stock
price." Accounts payable and accrued liabilities totaling $3,653,831 at December
31, 1998 increased from $2,539,585 at the prior year-end period primarily due to
increased inventory purchases. Inventory levels increased approximately $2.7
million, net of a writedown of $156,620 for obsolete inventory, to accommodate
the increased sales volume generated by the Apollo 95E.

Capital expenditures for the fiscal year ended December 31, 1998 were
approximately $722,000, with approximately $170,000 spent for the purchase of an
exhibit booth used at dental trade shows, approximately $171,000 spent for a new
computer network system, and approximately $131,000 spent for molds. Cash and
cash equivalents on hand at the end of the period were $3,941,305. From the debt
placement in March 1998 we received approximately $4,200,000 in cash after
expenses.

In July 1997, we finalized a credit agreement with Comerica Bank providing
us up to a $2,000,000 line of credit, secured by a first priority security
interest in our assets and by an assignment of our rights under our distribution
agreement with Boston Marketing. The credit facility bears interest at the rate
of prime plus .25% per annum (8.0% at December 31, 1998). All borrowings under
the facility are subject to a formula based, generally, on accounts receivable
and inventory. No amounts were outstanding at December 31, 1997.

In December 1997, we finalized a second credit agreement with Comerica
extending up to a $500,000 line of credit to us for capital expenditures,
secured by a first priority interest in our assets. The credit facility bears
interest at a rate of prime plus .5% per annum (8.25% at December 31, 1998). The
line expired on December 10, 1998, at which time the principal balance began to
amortize over a thirty-six (36) month period. Borrowings are at 80% of the
capital expenditure. At December 31, 1998, $343,890 was outstanding.

On January 4, 1999, we replaced the Comerica facilities with a $6,950,000
facility with Imperial Bank. The Imperial facility comprises a $2,500,000 fixed
rate non-revolving line of credit due May 31, 2000; a $4,000,000 variable rate
revolving line of credit due May 31, 2000; and a $450,000 variable interest rate
loan repayable in 16 monthly installments. The facilities are collateralized by
our assets. We intend to use the credit facilities, when needed, for working
capital, capital expenditures and general corporate purposes. On January 21,
1999, we borrowed against the Imperial facility to repay the balance owing on
the Comerica capital credit line of $343,890 plus accrued interest of $1,120. On
January 25, 1999, we borrowed against the Imperial facility to repay all of our
$4,500,000 12% senior subordinated notes plus accrued interest of $189,000.

As of the end of March 1999, our expenditures for continued research and
development for products incorporating digital x-ray technology (including the
additional development fee due to Suni upon our acceptance of the final
prototype subsystem and minimum royalty obligations), our minimum

20
<PAGE>
purchase obligations under our distribution agreement with Boston Marketing and
our purchase obligations under a manufacturing agreement we have with Suni
Microsystems, are the only significant future commitments which will be financed
by cash from continuing operations and the proceeds of the Imperial facility.

We believe that the net proceeds from this offering, together with our
existing cash and cash equivalents and funds generated from operations, will be
sufficient to meet our cash requirements for at least the next 12 months. We
intend to use approximately $1,500,000 of the net proceeds to launch products
incorporating the digital x-ray technology developed for us by Suni, if FDA
clearance is received. We will also utilize some of the proceeds to pay off
amounts owing under the Imperial Bank credit facility and to fund development of
new products. We do not currently have any plans, proposals, arrangements or
understanding with respect to any future acquisitions. If we require additional
capital, we may sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity securities could result in
additional dilution to our stockholders and the incurrence of additional debt
could result in additional interest expense.

FLUCTUATIONS IN QUARTERLY RESULTS

Our business is subject to certain quarterly influences. Net sales and
operating profit are generally higher in the fourth quarter due to the
purchasing patterns of dentists in the United States and are generally lower in
the first quarter due primarily to the effect upon demand or increased purchases
in the prior quarter. We also expect that our business will experience lower
sales in the summer months as a consequence of holiday vacations and a lesser
number of trade shows.

The following table sets forth unaudited data regarding operations for each
quarter of fiscal 1998 and the first quarter of fiscal 1999. This quarterly
information has been prepared on the same basis as the annual consolidated
financial statements and, in our management's opinion, contains all adjustments
necessary to fairly state the information set forth herein. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1998 FISCAL 1998 FISCAL 1998 FISCAL 1999
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FIRST QUARTER
------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 2,110,531 $ 2,618,513 $ 6,157,358 $ 8,341,396 $ 10,214,485
Cost of sales...................... 1,550,089 1,946,906 2,866,104 3,457,783 4,912,476
------------- -------------- ------------- -------------- -------------
Gross profit..................... 560,442 671,607 3,291,254 4,883,613 5,302,009
Selling, general and administrative
expense.......................... 1,729,619 2,134,639 1,845,232 3,055,420 3,454,598
Research and development expense... 142,387 182,302 197,283 27,332 142,580
------------- -------------- ------------- -------------- -------------
Operating income (loss).......... (1,311,564) (1,645,334) 1,248,739 1,800,861 1,704,831
Interest and other income.......... (44,273) (64,057) (47,103) (40,099) (31,558)
Interest expense................... 83,793 549,497 551,416 554,987 441,016
Amortization of debt issuance
costs............................ 10,484 75,000 75,000 75,000 64,516
------------- -------------- ------------- -------------- -------------
Income (loss) before income
taxes.......................... (1,361,568) (2,205,774) 669,426 1,210,973 1,230,857
Provision for income taxes......... -- -- -- 129,759 71,080
------------- -------------- ------------- -------------- -------------
Net income (loss)................ $ (1,361,568) $ (2,205,774) $ 669,426 $ 1,081,214 $ 1,159,777
------------- -------------- ------------- -------------- -------------
------------- -------------- ------------- -------------- -------------
</TABLE>

Quarterly results may be adversely affected in the future by a variety of
other factors, including the possible costs of obtaining capital, as well as the
release of new products and promotions taking place within the quarter. We plan
to continue to fund research and development and to increase working capital
requirements for the new products. Also, our expenses are to a large extent
fixed and not

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<PAGE>
susceptible to rapid reduction. To the extent that such expenses precede or are
not subsequently followed by increased revenues, our business, operating results
and financial condition will be adversely affected.

YEAR 2000 ISSUE

The Year 2000 issue has an impact on both information technology systems and
non-information technology systems, such as manufacturing systems and physical
facilities including, but not limited to, security systems and utilities. We
have tested all of our information technology systems and non-information
technology systems for Year 2000 readiness. All of our non-information
technology systems are Year 2000 compliant. With respect to information
technology systems, our strategy is to replace all non-Year 2000 compliant
information technology systems by June 30, 1999. As of April 15, 1999, our
in-house data network is Year 2000 compliant. Also as of April 15, 1999, eighty
percent of our workstations are Year 2000 compliant, with the remainder to be
replaced with Year 2000 compliant workstations by June 30, 1999. Although our
management believes that its efforts will be successful and the costs will be
immaterial to our consolidated financial position and results of operations, it
also recognizes that any failure or delay could cause a potential impact.

We have investigated the Year 2000 readiness of our key suppliers. Our
direction of this effort is to ensure that there are adequate resources and
supplies available to us to minimize any potential business interruptions. Our
assessment of our key suppliers is now complete and we have determined that our
policy of maintaining an inventory of components and supplies sufficient to last
a minimum of one to three months will be adequate to minimize almost any
potential business interruptions. We believe that our inventories will allow
enough time for our suppliers to remedy Year 2000 problems that may arise in
their respective businesses.

The Year 2000 issue presents a number of other risks and uncertainties that
could impact us, such as public utilities failures, potential claims against us
for damages arising from products and services that are not Year 2000 compliant,
and the response ability of certain government commissions of the various
geographic areas where we conduct business. While we continue to believe the
Year 2000 issues described above will not materially affect our financial
position, it remains uncertain as to what extent, if any, we may be impacted.

If we, our customers or suppliers are unable to resolve any Year 2000
compliance problems in a timely manner, we could face business interruptions or
a shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. We anticipate that all of our internal systems will be Year 2000
compliant by June 30, 1999 and that we will have adequate resources and supplies
available to us to minimize any potential business interruptions that may result
from Year 2000 compliance problems experienced by our suppliers. As a result, we
have determined that we will not be developing any contingency plans that
address a reasonably likely worst case scenario.

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<PAGE>
BUSINESS

GENERAL

We design, develop, assemble and market high technology dental equipment and
related consumables. Our best selling product during 1998 was the tooth curing
and whitening device known as the "Apollo 95E." We also market and sell a line
of whitening gels known as "Apollo Secret" for use with the Apollo 95E, and in
the second quarter of 1999 intend to introduce a line of composite resin
materials known as "ASAP--Accelerated Solutions for Aesthetic Procedures," also
for use with the Apollo 95E. In addition, we manufacture and sell intraoral
camera systems, known as the "TeliCam II System," and "TeliCam Elite," and a
multi-operatory intraoral camera system, known as the "InTELInet," for use in
connection with the TeliCam II System and TeliCam Elite.

Our customers are dentists in the domestic and international marketplace. In
the domestic market, the United Kingdom and Germany, we sell directly to
dentists. In the international market, with the exception of the United Kingdom
and Germany, we sell our products through independent dealers and distributors.
Our products are not available through traditional retail channels.

We were originally organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983. On February 2, 1998, we
formed "DMDS, Ltd.," a wholly owned subsidiary created under the laws of the
United Kingdom. We market our products in Europe and the Middle East through
DMDS, Ltd.

BUSINESS STRATEGY

Our goal is to be a leading manufacturer and distributor of both high
technology dental devices and related consumables. We believe that our focus on
the following business strategies will help us to achieve this goal:

DELIVERY OF INNOVATIVE, VALUE-ORIENTED PRODUCTS. We seek to provide
innovative products that offer a strong price-value relationship to our
customers. We endeavor to deliver products that offer, or will offer,
greater or differentiated operating features, such as our Apollo 95E
(described below) which can cure composite materials in just three seconds,
as compared with the 10-60 seconds it takes other competing brands of curing
lamps, and is able to whiten teeth in under 40 minutes. We also plan to
introduce new products incorporating innovative digital x-ray technology
into the worldwide marketplace during the third quarter of 1999. See "Risk
Factors--In order to maintain our exclusive rights to the digital x-ray
technology developed by Suni we must make certain minimum royalty payments
to Suni" and "Risk Factors--The Government extensively regulates our
products."

COMMITMENT TO PRODUCT DEVELOPMENT. We are continually seeking out
innovative technology to incorporate into our dental products. From
inception (October 23, 1995) through December 31, 1998, we have devoted
approximately $2.65 million to product development activities, including
approximately $549,000 in fiscal 1998. The dental market is highly
competitive and we believe that our focus on new and improved technologies
is essential if we are to continue to grow and to maintain a competitive
position in the marketplace.

GROWTH THROUGH ACQUISITIONS AND LICENSING AGREEMENTS. We anticipate that
we will complement our internal growth, both in number of products and
sales, through acquisitions and licensing agreements and a focus on
developing and marketing new technologies for the dental practice. We
believe that acquisitions and licensing agreements present an effective
means of obtaining technical personnel and obtaining or expanding
technologies, products and markets. We continually evaluate opportunities
for acquisitions and licensing agreements.

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<PAGE>
EXPANSION OF DOMESTIC AND INTERNATIONAL SALES. Although both the
domestic and international dental supply markets are highly competitive, we
believe that the size of these markets provides an opportunity for growth.
We plan on introducing a composite curing consumable for use with the Apollo
95E during the second quarter of 1999 and new products incorporating digital
x-ray technology into the worldwide marketplace during the third quarter of
1999. Also, in an effort to expand international sales of our current and
future products, we have altered our marketing strategy in two of the
biggest markets in Europe, Germany and the United Kingdom, by acquiring the
assets of the third party distributorships who were distributing our
products in those respective countries. We believe that by duplicating our
domestic marketing strategy in Germany and the United Kingdom by selling
directly to dentists, we have increased our opportunity for growth because
of the increased direct access to customers. We intend to capitalize on our
experienced management and sales team to increase our domestic and
international sales. See "Risk Factors-- In order to maintain our exclusive
rights to the digital x-ray technology developed by Suni we must make
certain minimum royalty payments to Suni."

CURRENT PRODUCTS

THE APOLLO 95E-TM-

On October 2, 1997, we purchased the assets of Societe D' Exploitation
Dentaire, a company organized under the laws of France. Among the acquired
assets was a patent for S.E.D.'s "Biotron" curing and whitening device
technology. From this technology, we developed the "Apollo 95E" a unique,
visible-light curing instrument which is designed for two different
applications: the hardening of tooth-colored dental composite materials in three
seconds or less and for single appointment, in-office tooth whitening in less
than forty minutes. This safe plasma-arc lamp uses a high-frequency electrical
field to generate plasma energy, which is ideal for the fast-curing (hardening)
of photosensitive composites. The Apollo 95E also produces light and heat which,
when used in conjunction with Apollo Secret whitening gel, activates the
whitening chemicals in the Apollo Secret. The result of this activation is
dramatic whitening of discolored teeth. The rapid performance of the Apollo 95E
in both hardening composite materials and whitening teeth enables an average
dental practice to save about 5 to 8 hours per month of a dentist's examination
time.

CURING COMPOSITES: Tooth-colored composite materials are one of the most
requested methods of tooth restoration (bonding) in use today. They are
delivered to the tooth in syringe-shaped tubes and then shaped into the
proper tooth contours with dental instruments. In order to cure (harden)
these paste-like materials, a visible light curing lamp (Apollo 95E) is used
to initiate the proper chemical reaction. The hand-piece to the Apollo 95E,
which delivers the actual light beam to the mouth, is a cylindrical shaped
instrument approximately the size of a large pen with a curved end designed
to make it easy for a dentist to be able to restore or whiten hard to reach
surface areas of teeth. The light emanates from the tip of the instrument.

The Apollo 95E cures most filling materials in just three seconds or
less compared with the 10-60 seconds it takes other competing brands of
curing lamps. Most restorations require the dentist to place multiple layers
of composite material into/onto a tooth, curing each layer separately. With
the curing lamps that are still used in most dental offices today, total
curing time per tooth averages 2 to 4 minutes. The Apollo 95E shortens the
curing time to under 3 seconds per layer with the same results. Composite
curing is an essential aspect for the practice of dentistry in all
countries, making curing lamps a practical device for all dental offices.

WHITENING: "Power bleaching" or "Light-assisted Bleaching" is fast
becoming a sought-after dental protocol which allows the patient to leave
the dental office, in under 40 minutes, with a dramatically whitened smile.
The most common alternative tooth-whitening method to the Apollo 95E
currently available requires the patient to wear an uncomfortable
custom-fitted tray filled with

24
<PAGE>
peroxide based whitening gels. In order to achieve dramatic whitening
results, the trays would have to be worn overnight or for several hours a
day for two to three weeks. In addition, patients often find themselves in
pain from extended soft-tissue contact with the caustic gel.

With the Apollo 95E, the process is much quicker. The Apollo Secret gel
is simply applied to the patient's teeth without any tissue protection, as
the gel's special neutralizing component virtually eliminates any tooth or
tissue sensitivity. The dentist or dental assistant holds the Apollo 95E
against the gel and then applies the light to each tooth for only 3 seconds.
Several passes are made around all of the teeth being bleached and 40
minutes later the patient leaves the office with whitened teeth. The ability
of the Apollo Secret gel to neutralize tissue sensitivity distinguishes
Apollo Secret from most competitive products. This feature is the result of
an encapsulating technology which is the subject of a pending patent
application. We cannot guarantee that a patent will be issued for the
encapsulating technology, or that the patent, if issued, will provide
meaningful protection.

Because the Apollo 95E is not a laser device, in-office tooth whitening
in less than forty minutes can be done by a dental assistant in a majority
of states in the United States. This allows the dentist to concentrate on
more complex procedures, while offering dentists an additional source of
revenue that can be generated by a dental hygienist/assistant.

In March 1998, we introduced this proprietary, non-laser technology to
markets outside of the US and Canada. After receiving FDA 510(k) clearance in
August 1998, we began shipping the Apollo 95E in the US and Canada. Our facility
in Irvine, CA handles the manufacturing and shipping of this product line for
North America, South America, Australia, New Zealand and for the Pacific Rim
countries. For the overseas markets, including Europe and the Middle East, the
Apollo 95E is manufactured and shipped from our facility in France.

The Apollo 95E has received acceptance in both domestic and international
dental markets, and sales have increased every quarter since its introduction.
We believe that the Apollo 95E non-laser lamp produces faster composite curing
and in-office tooth whitening results than any other known like-product
available today, including dental lasers designed for curing.

On October 2, 1998, we entered into an agreement with Chrysalis Dental, Inc.
which grants us the exclusive worldwide license to make or have made, use, or
sell patent pending tooth whitening products created by CDI. Under this license,
we have begun marketing our own line of tooth whitening gels (Apollo Secret),
intended for use with the Apollo 95E and competing lamps. See "Risk Factors--As
a result of the decline in sales of the TeliCam, our future depends on our
ability to develop and introduce new products."

In the second quarter of 1999, we plan to introduce a new line of
restorative composite materials (ASAP). As with Apollo Secret, ASAP is intended
for use with the Apollo 95E and competing lamps. See "Risk Factors--As a result
of the decline in sales of the TeliCam, our future depends on our ability to
increase demand for our Apollo 95E and related products as well as our ability
to develop and introduce new products."

Since the introduction of the Apollo 95E in March 1998, and through December
31, 1998, we have sold 2,907 units internationally, accounting for approximately
$6.6 million in revenues, and 1,479 units domestically, accounting for
approximately $4.5 million in revenues.

THE TELICAM, INTRAORAL CAMERAS

Our best selling product from 1996 through mid-1998 was our line of
intraoral cameras beginning with the "TeliCam I," which was introduced into the
market in February 1996. In the second quarter of 1997, we began marketing the
"TeliCam II System," which was developed to allow the video interfacing of
multiple examination rooms via our networking system known as InTELInet
(described below).

25
<PAGE>
Currently, our primary intraoral camera is the "TeliCam Elite," which was
introduced into the market during the second quarter of 1998. The distinguishing
feature that sets the TeliCam apart from competing intraoral dental cameras is
the proprietary "Teli" CCU processor. This "frame grabber computer chip" allows
the camera to capture and "freeze" multiple video images and display them
simultaneously without an additional external capture device such as a computer,
video recorder, or video color printer. In addition, the Teli CCU processor
incorporates an automatic light intensity control which substantially eliminates
reflection and glare from the intraoral illumination providing clearer video
images. We have exclusive worldwide rights to market the Teli CCU processor to
the dental market. Our cameras also have the capability to focus as closely as
two (2) millimeters and have magnification capabilities of up to 120 times the
actual image without requiring a lens change. These TeliCam images assist
dentists in displaying dental health and hygiene problems to patients and, as a
result, can assist to promote patient acceptance of treatment plans.

Through December 31, 1998, we had sold an aggregate of 6,039 TeliCam I,
TeliCam II and TeliCam Elite Systems to dentists throughout the United States,
as well as to several dental schools, and an aggregate of 2,842 TeliCam I,
TeliCam II and TeliCam Elite Systems internationally.

As a result of price erosion and decreasing margins caused by increased
competition from new manufacturers entering the marketplace, we believe that the
market for intraoral cameras has become both saturated and less profitable,
resulting in a decline in revenues from our intraoral camera products. We are
currently researching new technological advancements and clinical uses for our
line of intraoral cameras. See "Risk Factors--One of our primary products has
had a significant decline in sales and if this decline continues we may not be
able to achieve profitability."

INTELINET

In November 1996, we introduced our InTELInet Video Monitoring System which
creates a video-electronic information link between the different examination
rooms within the same dental office. The System includes a minimum of two
intraoral video cameras, a video monitor with built-in VCR, cable installation
and a single video printer. The InTELInet System allows dentists and their
assistants the ability to conduct multiple patient video examinations at the
same time because the "TeliCam" has its own built-in video microprocessor
capture device. This proprietary design allows for the use of just one central
video printer to interface with multiple examination rooms using cameras
simultaneously. This creates a cost savings and functional benefit when compared
to competing dental inter-operatory video networking systems that require
expensive computers, video printers, or capture devices for each operatory.

Due to the general absence of multiple operatory practices outside of the
United States, we are only marketing the InTELInet domestically. The InTELInet
network is only compatible with our intraoral dental cameras. See "Product
Development." From the time of its first introduction in late November 1996,
through December 31, 1998, an aggregate of 599 InTELInet multiple operatory
networking systems have been sold by us.

PRODUCT DEVELOPMENT.

We intend to pursue growth through new product development and introduction
and by improving and updating our current products to respond to competitive
pressures.

We entered into an agreement with Suni Imaging Microsystems, Inc. to develop
digital x-ray technology for incorporation into a digital x-ray system for the
dental market. We have obtained exclusive rights to market products to the
dental market incorporating certain digital x-ray technology developed by Suni.
Suni will retain the rights to developed microchip technology underlying the
x-ray system it develops for us. Digital x-ray systems, including those
currently on the market, reduce radiation exposure compared to conventional
x-ray systems and allow dentists to view x-ray images in

26
<PAGE>
real-time without the time-consuming process of film development while
eliminating the need to use and dispose of chemicals required to develop
conventional x-ray film. We believe that this technology will provide improved
image quality and a more comfortable sensor for the patient at a lower price
point than competitive systems. This technology also is designed to allow
database storage and recall of images for comparison purposes. The development
of the technology has been, and will continue to be, performed by Suni and
funded by us. No assurance can be given that we will be able to commercially
exploit the digital x-ray technology. Additionally, we filed for 510(k)
notification on January 5, 1999 and are currently waiting for such notification,
and therefore, the timing of the domestic introduction of the product is
uncertain. See "Description of Business--Government Regulation" and "Risk
Factors--The government extensively regulates our products."

We expended approximately $549,000 and $1.2 million for research and
development of our products for the fiscal years ended December 31, 1998 and
1997.

MANUFACTURING AND COMPONENT PARTS

We assemble and test the Apollo 95E curing and whitening lamps, the TeliCam
Elite video camera system and the TeliCam II video camera system sold to North
America, South America, Australia, New Zealand and the Pacific Rim countries, at
our facility located in Irvine, California. For the overseas markets, including
Europe and the Middle East, the TeliCam products are assembled and tested at our
facility in Irvine, while the Apollo 95E is assembled and tested at our facility
in France. With the exception of the TeliCam's CCU processor, we believe that
there are multiple sources from which we may purchase the components for the
Apollo 95E and the TeliCam Systems. We anticipate that the single source from
which we obtain the CCU processor component of the TeliCam System is capable of
meeting projected demand for the foreseeable future. Although we believe that,
if necessary, we will be able to negotiate satisfactory alternative supply
arrangements, failure to do so may have a material adverse effect on us.
Furthermore, we cannot guarantee that suppliers will dedicate sufficient
production capacity to satisfy our requirements within scheduled delivery times
or at all. Failure or delay by our suppliers in fulfilling our anticipated needs
may adversely affect our ability to market the Apollo 95E and the TeliCam
Systems.

Effective October 1, 1996, we amended our distribution agreement with Boston
Marketing, a licensed distributor of the Teli manufactured CCD chip which
includes the Teli CCU processor. Pursuant to the distribution agreement with
BMC, we have the exclusive right to market certain Teli manufactured CCD chip
assemblies with CCU processors (model numbers CS6110 S/B with Frame Grabber,
CS6110 P S/B with Frame Grabber and the CS6110 S/B without Frame Grabber) to the
dental market, and to use the "TeliCam" trademark. The Teli units are key
components of our intraoral digital cameras. The distribution agreement with BMC
has a five-year initial term. We have agreed to purchase a minimum of 2,500 Teli
units per year for each of the five years, at an initial price of $750 per Teli
unit. The distribution agreement is terminable by Boston Marketing if we fail to
meet our annual minimum purchase obligation. While the term of the distribution
agreement with BMC expires on December 31, 2000, it may be extended by mutual
agreement for an additional five-year term. As of the date hereof, we have not
made a determination as to whether we will attempt to renew this agreement. We
believe that, if necessary, other CCD chips, CCU processors and frame grabbers
could be obtained from third-party suppliers on comparable terms, although a
disruption in supplies of components could extend for up to six months, which
would materially adversely affect our operating results.

On March 17, 1999, we entered into a manufacturing agreement with Suni under
which Suni will assemble, test and package our digital x-ray system
incorporating the digital x-ray technology developed by Suni for us. We are
currently working with Suni to produce a digital x-ray system that meets our
specifications. While we believe that an acceptable device will be manufactured,
no assurance can be given that Suni will be able to produce a product which will
meet our specifications. Under the

27
<PAGE>
agreement, which has a three year term, we have guaranteed payment in full for
at least 3,000 units per year and have agreed to place orders for at least 750
units per quarter. We have also agreed to fulfill all of our requirements for
the x-ray product from Suni during the term of the agreement. We cannot begin
shipping products under this agreement to the domestic market until we receive
510(k) clearance. If, and when, 510(k) clearance is received, we intend to begin
introducing the digital x-ray system for sale worldwide. See "Risk Factors--We
substantially depend upon third party development agreements and licensing
agreements for the development of many of our products and the licensing of
technology owned by others for use in our products and if these third parties
are unable to deliver we may be forced to limit our operations--The government
extensively regulates our products."

BACKLOG

We generally do not operate with significant order backlog and a substantial
portion of our revenues in any quarter is derived from orders booked in that
quarter.

MARKETING AND SALES

US SALES AND DISTRIBUTION. Our domestic sales are made by eight full-time
employees who are based at corporate headquarters, and a national field force of
fourteen independent sales representatives under the supervision of twenty
independent regional managers. Our full time sales employees are generally
experienced in the business of marketing and distribution of dental products,
inclusive of the TeliCam II, the TeliCam Elite intraoral cameras, the Apollo 95E
high intensity composite curing and in-office whitening system and related
consumables. We market our products through direct mail solicitations,
professional publications advertising, and attendance at dental conferences.
Since March 1996 we have run advertisements in various publications for the
dental industry on a monthly basis, and have attended in excess of 127, 75, and
70 dental conferences and trade shows during 1998, 1997 and 1996, respectively.
In addition to an increase in the number of dental conferences and trade shows
attended, during fiscal 1998 we expanded our marketing efforts by engaging in a
more comprehensive mailing campaign and increasing publications advertising. We
have also sold equipment and consumables to a number of dental schools including
the University of Chicago, Tufts University and the University of Louisville. We
believe that these and anticipated future dental school sales will generate
additional interest in, as well as familiarity with, our products at the initial
stages of a dental professional's career.

INTERNATIONAL SALES AND DISTRIBUTION. In the international market, with the
exception of the United Kingdom and Germany, we sell the Apollo 95E and the
TeliCam System through independent dealers and distributors, pursuant to oral
distribution agreements. Presently, we have approximately fifty independent
distributors and dealers, which cover key international markets including, the
Middle East, the Far East, Europe, Australia and Canada. On September 17, 1997
we repurchased distribution rights for our products in the European market from
an independent distributor for 50,000 shares of our common stock. Our
international distributors provide important support, including customer support
and product service, to customers in each of their respective countries. We had
an agreement with Hiroki Umezaki, a former officer, director and principal
stockholder of ours, pursuant to which he was to receive a 15% commission on all
sales made by us in Asia, except Japan, in which his commission was to be 12%.
This agreement has been amended to provide that Mr. Umezaki shall receive a 12%
commission on sales made in Japan only. We market the Apollo 95E in Europe and
the Middle East through our wholly owned subsidiary, DMDS, Ltd. and in the US
and internationally, outside of Europe and the Middle East, we market it through
our domestic facilities and an existing network of international distributors.

On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase price
consisting of 100,000 shares of our common stock. DMD Germany's sole business
was the sale and distribution of our products in Germany. The

28
<PAGE>
assets that DMDS, Ltd. purchased include the business (as a going concern),
customer lists, goodwill, the benefit of the lease and other contracts with
third parties and all other items of whatever nature owned by DMD Germany and
used in the conduct of the business of DMD Germany. We also entered into an
employment agreement with Ralf Muller, the General Manager of DMD Germany. We
intend to continue the business of DMD Germany as currently operated. We
purchased the assets of DMD Germany for the purpose of increasing our revenues
and the margins on products sold in Germany.

On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom, for a
purchase price consisting of 50,000 shares of our common stock. Midas, Ltd.'s
primary business was the sale and distribution of our products in the United
Kingdom. The assets that DMDS, Ltd. purchased include the business (as a going
concern), customer lists, goodwill, the benefit of the lease and other contracts
with third parties and all other items of whatever nature owned by Midas, Ltd.
and used in the conduct of the business of Midas, Ltd. We also entered into a
non-compete agreement with Sostre NV, the entity that has distributed our
products for Midas, Ltd. We intend to continue the business of Midas, Ltd.
substantially as currently operated. We purchased the assets of Midas, Ltd. for
the purpose of increasing our revenues and the margins on products sold in the
UK.

INTERNET-RELATED MARKETING AND DISTRIBUTION. On April 12, 1999, we formed a
new wholly-owned subsidiary, DMDcorp.com, Inc., a Delaware corporation, to
market our proprietary, as well as non-proprietary, dental products on the
Internet to both dentists and non-dentist consumers worldwide. We intend to
offer to dentists the ability to purchase, for professional application, all of
our high quality tooth whitening and composite curing products in addition to
other dental related hardware and software products, including, if 510(k)
clearance is received from the FDA, products incorporating the digital x-ray
technology developed for us by Suni. Other features we plan to make available to
dentists on the planned website, which is currently under development, include:

- on-line information regarding worldwide seminars and dental shows,

- important information and issues relating to dentistry with the ability
for dentists to obtain continuing education credits on-line, and

- the ability of dentists in each geographical region to aggregate their
buying power to earn group discounts on purchases of our products.

DMDcorp.com marks our first significant attempt at directing marketing
efforts at non-dentist consumers. Home-applied products relating to oral hygiene
and tooth whitening, specifically DMD's Apollo 95E-TM- tooth whitening home
application kit, will be marketed to non-dentists through the planned e-commerce
website. We expect to launch DMDcorp.com's website in the fourth quarter of
1999.

TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE

We believe that operating our current products requires very little
training. As part of our customer service program, the sales representative or
international distributor responsible for the sale of the TeliCam, the Telicam
Elite and the Apollo 95E schedules an installation and training appointment when
the system is delivered. In addition, we provide a systems operating manual to
our customers which provides answers to frequently asked questions about our
product's operations. Our technical support personnel, and internationally, the
support personnel of our distributors, are also available to answer customer
telephone inquiries during normal business hours. All of our Telicams and Apollo
95Es come with a one-year complete parts and labor warranty and extended
warranties are also available. InTELInet installation and maintenance is
provided through independent installers retained by us. We are currently
developing a program for training, customer support and service for the products
we plan to introduce in 1999.

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<PAGE>
PATENTS AND PROPRIETARY RIGHTS

One of our subsidiaries, DMDS, Ltd., holds a patent in France and is
currently seeking worldwide patent protection for the Apollo 95E system. We
cannot guarantee that patents outside of France will be granted for the Apollo
95E system, and if granted, the patents will provide adequate protection for our
technologies. Protection is being sought in all of the countries of the world in
which this technology can be marketed. We have an exclusive worldwide license to
distribute the whitening system technology used in Apollo Secret, which is the
subject of a pending application for patent in the US. We have established
rights in the trademarks under which we sell our lamps and consumable products
and have sought to register these trademarks with the United States Patent and
Trademark Office.

The intellectual property rights to the TeliCam System are owned by third
parties. Pursuant to an agreement with Boston Marketing Company, Ltd. we have
the exclusive right to market TeliCam's CCD processor unit to the dental market.
Also pursuant to this agreement, we have the rights to use the "TeliCam"
trademark.

Our success and ability to compete is dependent in part upon our proprietary
technology for which domestic and international patent protection is pending.
Our proprietary technology for the TeliCam is not protected by any patents.
Consequently, we rely primarily on trademark, trade secret and copyright laws to
protect this technology. Also, we have implemented a policy that all employees
and third-party developers sign nondisclosure agreements. However, there can be
no assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently. Also, we have no license agreements with the end users
of our products so it may be possible for unauthorized third parties to copy our
products or to reverse engineer or otherwise obtain and use information that we
regard as proprietary. If litigation is necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on our business, operating results and financial condition.
Ultimately, we may be unable, for financial or other reasons, to enforce our
rights under intellectual property laws. In addition, the laws of certain
countries in which our products are or may be distributed may not protect our
products and intellectual property rights to the same extent as the laws of the
United States. See "Risk Factors--None of our products are protected by
patents."

We believe that our products do not infringe upon any valid existing
proprietary rights of third parties. There can be no assurance that third
parties will not assert infringement claims in the future. Any such third party
claims, whether or not meritorious, may be covered by present insurance policies
but could, nevertheless, result in costly litigation or require us to enter into
royalty or licensing agreements. There can be no assurance that we would prevail
in any such litigation or that any such licenses would be available on
acceptable terms, if at all. If we were found to have infringed upon the
proprietary rights of third parties, we could be required to pay damages, cease
sales of the infringing products and redesign or discontinue such products, any
of which alternatives, individually or collectively could have a material
adverse effect on our business, operating results and financial condition.

GOVERNMENT REGULATION

We sell products which are legally defined to be medical devices, therefore,
we are considered to be a medical device manufacturer and as such are subject to
the regulations of, among other governmental entities, the United States Food
and Drug Administration and the corresponding agencies of the states and foreign
countries in which we sell our products. These regulations govern the
introduction of new medical devices, the observance of certain standards with
respect to the manufacture and labeling of medical devices, the maintenance of
certain records and the reporting of

30
<PAGE>
potential product problems and other matters. A failure to comply with such
regulations could have material adverse effects on us.

The Federal Food, Drug and Cosmetic Act regulates medical devices in the
United States by classifying them into one of three classes based on the extent
of regulation believed necessary to ensure safety and effectiveness. Class I
devices are those devices for which safety and effectiveness can reasonably be
ensured through general controls, such as device listing, adequate labeling,
premarket notification and adherence to the Quality System Regulation as well as
medical device reporting, labeling and other regulatory requirements. Some Class
I medical devices are exempt from the requirement of pre-market approval or
clearance. Class II devices are those devices for which safety and effectiveness
can reasonably be ensured through the use of special controls, such as
performance standards, post-market surveillance and patient registries, as well
as adherence to the general controls provisions applicable to Class I devices.
Class III devices are devices that generally must receive premarket approval by
the FDA pursuant to a pre-market approval application to ensure their safety and
effectiveness. Generally, Class III devices are limited to life sustaining, life
supporting or implantable devices; however, this classification can also apply
to novel technology or new intended uses or applications for existing devices.

Before they can be marketed, most medical devices introduced to the United
States market are required by the FDA to secure either clearance of a pre-market
notification pursuant to Section 510(k) of the FDC Act or approval of a PMA.
Obtaining approval of a PMA application can take several years. In contrast, the
process of obtaining 510(k) clearance generally requires a submission of
substantially less data and generally involves a shorter review period. Most
Class I and Class II devices enter the market via the 510(k) clearance
procedure, while new Class III devices ordinarily enter the market via the more
rigorous PMA procedure. In general, approval of a 510(k) clearance may be
obtained if a manufacturer or seller of medical devices can establish that a new
device is "substantially equivalent" to a predicate device other than one that
has an approved PMA. The claim for substantial equivalence may have to be
supported by various types of information, including clinical data, indicating
that the device is as safe and effective for its intended use as its legally
marketed equivalent device. The 510(k) clearance is required to be filed and
cleared by the FDA prior to introducing a device into commercial distribution.
Market clearance for a 510(k) Notification submission may take 3 to 12 months or
longer. If the FDA finds that the device is not substantially equivalent to a
predicate device, the device is deemed a Class III device, and a manufacturer or
seller is required to file a PMA application. Approval of a PMA application for
a new medical device usually requires, among other things, extensive clinical
data on the safety and effectiveness of the device. PMA applications may take
years to be approved after they are filed. In addition to requiring clearance or
approval for new medical devices, FDA rules also require a new 510(k) filing and
review period, prior to marketing a changed or modified version of an existing
legally marketed device, if such changes or modifications could significantly
affect the safety or effectiveness of that device. The FDA prohibits the
advertisement or promotion of any approved or cleared device for uses other than
those that are stated in the device's approved or cleared application.

We have already received FDA 510(k) clearance allowing marketing of the
Telicam intraoral camera and the Apollo 95E. In addition, in preparation for the
anticipated third quarter 1999 introduction of our digital x-ray medical device,
we have submitted an application for 510(k) clearance to the FDA. We can not
guarantee that 510(k) clearance for the digital x-ray device will be received.

Pursuant to FDC Act requirements, we have registered our manufacturing
facility with the FDA as a medical device manufacturer, and listed the medical
devices we manufacture. We are also subject to inspection on a routine basis for
compliance with FDA regulations. This includes the Quality System Regulations,
which, unless the device is a Class I exempt device, require that we manufacture
our products and maintain our documents in a prescribed manner with respect to
issues such as design controls, manufacturing, testing and validation
activities. Further, we are required to comply with other

31
<PAGE>
FDA requirements with respect to labeling, and the MDR regulations which require
that we provide information to the FDA on deaths or serious injuries alleged to
have been associated with the use of its products, as well as product
malfunctions that are likely to cause or contribute to death or serious injury
if the malfunction were to recur. We believe that we are currently in material
compliance with all relevant QSR and MDR requirements.

In addition, our facility is required to have a California Medical Device
Manufacturing License. The license is not transferable and must be renewed
annually. Approval of the license requires we be in compliance with the FDA's
QSR, labeling and MDR regulations. We have filed a timely application for a
license to cover our manufacturing activities, and in early March 1999 the
California Department of Health Services, conducted an inspection of our
facilities and found no "reportable observations." We received a list of
adjustments and clarifications recommended by the DHS. We filed a response to
this list on March 19, 1999 and expect to receive the license from the
California DHS in early May. We can not guarantee that the California DHS will
grant or renew our license. See "Risk Factors--We do not have California
licensing."

Generally, if we are in compliance with FDA and California regulations, we
may market our medical devices throughout the United States. International sales
of medical devices are also subject to the regulatory requirements of each
country. In Europe, the regulations of the European Union require that a device
have a CE mark before it can be sold in that market. We have obtained a CE mark
for our Apollo 95E device, TeliCam Elite and ASAP composite materials and are
seeking approval from the European Union to market the new digital x-ray
product. We have also applied for a CE mark for our Apollo Secret whitening gel.
The regulatory international review process varies from country to country. We,
in general, will rely upon our distributors and sales representatives in the
foreign countries in which we market our products to ensure that we comply with
the regulatory laws of such countries. We believe that our international sales
to date have been in compliance with the laws of the foreign countries in which
we have made sales. Failure to comply with the laws of such country could have a
material adverse effect on our operations and, at the very least, could prevent
us from continuing to sell products in such countries. Exports of most medical
devices are also subject to certain limited FDA regulatory controls.

PRODUCT LIABILITY AND INSURANCE

The nature of our present and planned products may expose us to product
liability risks. As of March 31, 1999, no product liability claims have been
brought against us. We maintain product liability insurance with coverage limits
of $1,000,000 per occurrence and $11,000,000 per year. While we believe that we
maintain adequate insurance coverage, there can be no assurance that the amount
of such insurance will be adequate to satisfy claims made against us in the
future or that we will be able to obtain insurance in the future at satisfactory
rates or in adequate amounts. Product liability claims or product recalls could
have a material adverse effect on our business and financial condition. In
addition, we are required under certain of our licensing agreements to indemnify
our licensors against certain product liability claims by third parties.

COMPETITION

The distribution and manufacture of dental supplies and equipment is
intensely competitive. For example, there are at least twelve companies offering
intraoral camera systems that are competitive with the TeliCam System. Our
dental curing and whitening device products face competition from existing
curing and whitening systems, including laser systems. Many of our competitors
have greater financial and other resources than we have, and, consequently, such
entities may be able to develop, manufacture, market and/or distribute systems
that are functionally similar or superior to our products. Moreover, significant
price reductions by our competitors could result in a similar reduction in our
prices. Any of these competitive pressures may have a material adverse effect on
operating results.

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<PAGE>
In the United States, we compete with other companies that sell dental
products, distributors and several major manufacturers of dental products,
primarily on the basis of price, customer service and value-added services and
products. Our principal domestic competitors for the TeliCam System are
Patterson Dental Co., Henry Schein, Inc., Dentsply and Ultracam. Our principal
domestic competitors for the Apollo 95E are Air Techniques, Kreativ Products and
American Dental Technologies. Our principal domestic competitors for the Apollo
Secret whitening gel are Kreativ Products, Ultradent Products, Discus Dental,
DenMat, Shofu Dental Corporation and American Dental Hygienics/Premier Dental.
Our principal domestic competitors for the ASAP composite materials are Bisco,
Jeneric/ Pentron, Kerr, 3M, Dentsply/Caulk, Ultradent Products and
Heraeus/Kulzer.

We also face competition in our international markets, where we compete on
the basis of price and product quality against the same dental product
distributors and manufacturers.

EMPLOYEES

At March 31, 1999, we had 79 full-time employees, 57 in the United States, 7
in the UK and 15 in France. Of the US employees, 27 were involved in production,
5 were in customer service, 14 were in administration, 8 were engaged in sales
and marketing, and 3 were involved in engineering and research and development.
Of the UK employees, 5 were in administration and 2 were engaged in sales and
marketing, and of the employees in France, 9 were involved in production, 2 were
involved in engineering and research and development, and 4 were in
administration. We believe that we have a good relationship with our employees
and none of our employees are represented by a collective bargaining agreement.

DESCRIPTION OF PROPERTIES

Our corporate headquarters and principal offices are located in Westlake
Village, California, consisting of approximately 3,900 square feet of space
under a lease that expires on November 14, 2000. The office lease provides for
aggregate minimum monthly rental payments of approximately $6,200. On January
15, 1999, we entered into a sublease for approximately 1,300 square feet of
space adjacent to the principal offices. The office sublease expires on June 30,
2000, and provides for aggregate minimum monthly rental payments of
approximately $2,500. Further, under a lease that expired on October 31, 1998,
we had approximately 5,700 square feet of space in a building in Irvine,
California, where we previously manufactured and distributed the TeliCam System
and conducted research and development activities. The rental payment under this
plant lease was approximately $5,310 per month. We sub-leased this facility from
March 15, 1998 through October 31, 1998 at a rate of $5,049 per month. We now
lease a larger facility in Irvine of approximately 12,000 square feet, under a
lease that expires October 31, 1999 at a rental payment of $6,750 per month to
perform these functions. All of these leases require us to pay taxes,
maintenance fees, insurance, and periodic rent increases based on a published
price index. We do not presently own, or have any current plans to invest in,
any interests in real property other than through our leases.

LEGAL PROCEEDINGS

We are not involved in any pending, nor are we aware of any threatened,
legal proceedings which we believe could reasonably be expected to have a
material adverse effect on our business, operating results or financial
condition.

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<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our
directors and executive officers at April 15, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert H. Gurevitch.................................. 58 Chairman of the Board, Chief Executive Officer and
President
Stephen Ross......................................... 40 Chief Financial Officer
Jack Preston......................................... 65 Executive Vice President of Product Development and
Director
Merle Roberts........................................ 49 Vice President of Manufacturing
Dewey Perrigo........................................ 45 Vice President of Sales
Marvin H. Kleinberg.................................. 71 Director
John Khademi......................................... 36 Director
</TABLE>

Directors are elected at each annual meeting of shareholders and hold office
until the following annual meeting and their successors are duly elected and
qualified. Our Bylaws presently provide that the number of directors shall be
fixed at five. Currently there are only four directors and the Board is
searching for a fifth director to fill the vacancy. Any vacancy on the Board of
Directors, including a vacancy from an increase in the size of the Board of
Directors, may be filled by the remaining directors. In no case will the Board
of Directors decrease the number of directors or shorten the term of any
incumbent director.

Executive officers are appointed and serve at the discretion of the Board of
Directors, subject to applicable employment contracts.

MR. GUREVITCH has been our Chairman of the Board, Chief Executive Officer
and President since March 1996, and was appointed Secretary in February 1997.
Mr. Gurevitch founded Dental Medical Diagnostic Systems, LLC in October 1995 and
was our Chief Executive Officer until we acquired it. From November 1994 until
February 1995, Mr. Gurevitch served as Chief Executive Officer of Dycam, Inc., a
manufacturer and marketer of digital cameras. From 1987 until his retirement in
August 1993, Mr. Gurevitch served as Chief Executive Officer and Chairman of the
Board at New Image Industries, Inc., a manufacturer and distributor of intraoral
cameras

MR. ROSS has been our Chief Financial Officer since July 1998. From
September 1995 until July 1998, Mr. Ross served as a Senior Consultant for Kibel
Green Inc., a company that specializes in turnaround consulting. From April 1997
to April 1998, Mr. Ross served as a consultant to Tag-It Pacific, Inc., a
company that provides brand identity tags to manufacturers of fashion apparel
and accessories. From 1992 through 1994, Mr. Ross was the Chief Financial
Manager for the Taper Family Trust. Mr. Ross was a Senior Tax Manager at Touche
Ross from 1982 through 1987. He became a Chartered Accountant in South Africa in
1982, and a Certified Public Accountant in California in 1983.

DR. PRESTON has been a Director of our company since February 1997. From
February 1997 through December 1998, he served as a consultant to us. Since
January 1999, he has served as our Executive Vice President of Product
Development. Dr. Preston has been The Don and Sybil Harrington Foundation
Professor of Esthetic Dentistry at the University of Southern California School
of Dentistry since 1979 where he was also the Chairman of the Department of Oral
and Maxillofacial Imaging and the director of Informatics. Dr. Preston resigned
his position with USC in December 1998 and has subsequently been named professor
Emeritus. Dr. Preston is also currently a Diplomat of the American Board of
Prosthodontics. Dr. Preston is an international lecturer on various aspects of
dentistry, an author of three textbooks and numerous articles and invited
chapters, and is widely considered to be an expert on current and future
applications of computer technology in dentistry.

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<PAGE>
MR. ROBERTS joined us in February 1996 as Director of Operations. On July 1,
1996, he was promoted to Vice President of Manufacturing. From 1988 until May
1994, Mr. Roberts served as Materials Manager for Advanced Interventional
Systems, a medical laser manufacturer. From June 1994 until January 1996, Mr.
Roberts was an independent consultant providing materials, management and
purchasing services to a variety of businesses. Mr. Roberts has taught material
management and related subjects at several Southern California colleges and
universities, and has served as a professional consultant on these topics.

MR. PERRIGO has served as our Vice President of Sales since March 1996.
Commencing in October 1995, he served in the same capacity at DMD, LLC. From
1988 through September 1995, Mr. Perrigo served as the Director of Sales of New
Image Industries, Inc.

MR. KLEINBERG has been a Director of our company since March 1996. Mr.
Kleinberg is a founding partner of the law firm Kleinberg & Lerner, LLP, and has
been a member of that law firm and its various predecessors since 1980. Mr.
Kleinberg has practiced in the area of intellectual property law since 1954. Mr.
Kleinberg serves as an adjunct lecturer in Patent Law at the Franklin Pierce Law
Center and is on the advisory council of the PTC Foundation, which publishes
"IDEA."

DR. KHADEMI has been a Director of the our company since March 1999. Dr.
Khademi has served as a consultant to us since October 1998. Dr. Khademi has
been in full time private practice of endodontics since 1994. Dr. Khademi is
also an Associate Clinical Professor in the Department of Maxillofacial Imaging
at the University of Southern California. Dr. Khademi lectures internationally
about computer use and dental practices and the latest in conventional
endodontic techniques.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors maintains a compensation committee and an audit
committee. The compensation committee evaluates our compensation policies and
administers our stock option plan. The members of the compensation committee are
Mr. Gurevitch, Mr. Kleinberg and Mr. Preston. The audit committee reviews the
scope of our audits, the engagement of our independent auditors and their audit
reports. The audit committee will also meet with the financial staff to review
accounting procedures and reports. The members of the audit committee are Mr.
Gurevitch, Mr. Kleinberg and Dr. Khademi.

DIRECTOR COMPENSATION

Effective April 1997, we agreed to compensate each of our directors who are
not officers of, or otherwise employed by us in the form of a $500 fee for their
personal attendance at formal meetings of the Board of Directors. No
compensation is paid for telephonic meetings. A total of $2,000 was paid to the
directors, as a group, for Board meeting attendance in 1998. During 1998, Dr.
Preston acted as a consultant to us from time to time at the request of the
Board, and was paid $48,000 in consulting fees during the year. Effective
January 1999, Dr. Preston accepted a full-time position with us as Executive
Vice President of Product Development. In addition, we pay all expenses incurred
by our directors for travel, etc. which are directly related to our business and
are within the scope of their positions with us, and we grant options to each of
our directors, as compensation for serving as directors.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation we
paid during the last three fiscal years to Robert H. Gurevitch, our principal
executive officer, to each of our most highly compensated executive officers
whose salary and bonus exceeded $100,000 during such year, and to other
significant employees.

35
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------- ---------------------------- PAYOUTS
OTHER SECURITIES -----------
ANNUAL RESTRICTED UNDERLYING LTIP
SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (2) AWARD(S) (#) ($)
- ---------------------------------- --------- --------- ----------- ----------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert H. Gurevitch(1)............ 1998 $ 286,000 -- -- -- 40,000 --
Chairman of the Board of 1997 250,885 -- -- -- 50,000 --
Directors, Chief Executive 1996 153,300 -- -- -- 5,120 --
Officer, President and Secretary
Dewey Perrigo(1).................. 1998 $ 156,000 -- -- -- 20,000 --
Vice President of Sales 1997 137,308 -- -- -- 25,000 --
1996 103,800 -- -- -- 34,133 --
Stephen F. Ross(3)................ 1998 $ 51,823 -- -- -- 35,000 --
Chief Financial Officer
Merle Roberts..................... 1998 $ 86,539 -- -- -- 20,000 --
Vice President of Manufacturing 1997 89,308 -- -- -- 25,000 --
1996 68,962 -- -- -- 17,066 --

ALL
OTHER
COMPENSATION
NAME AND PRINCIPAL POSITION ($)
- ---------------------------------- -----------------
<S> <C>
Robert H. Gurevitch(1)............ --
Chairman of the Board of --
Directors, Chief Executive --
Officer, President and Secretary
Dewey Perrigo(1).................. --
Vice President of Sales --
--
Stephen F. Ross(3)................ --
Chief Financial Officer
Merle Roberts..................... --
Vice President of Manufacturing --
--
</TABLE>

- ------------------------

(1) For a description of employment agreements between us and our executive
officers, see "Employment Agreements with Executive Officers" below this
table.

(2) Certain of our officers routinely receive other benefits from us, including
travel reimbursement, the amounts of which are customary in the industry. We
have concluded, after reasonable inquiry, that the aggregate amounts of such
benefits during fiscal 1998, did not exceed the lesser of $50,000 or 10% of
the compensation set forth above as to any named individual.

(3) Mr. Ross was appointed to the position of Chief Financial Officer effective
July 28, 1998.

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

We have entered into an agreement with Mr. Gurevitch whereby Mr. Gurevitch
has agreed to serve as Chairman of the Board of Directors and Chief Executive
Officer until October 1, 1999. Mr. Gurevitch's agreement provides for
compensation including salary at a minimum annual base compensation rate of
$180,000 prior to March 1, 1997 and $275,000 thereafter, and a car allowance and
a standard benefits package. Pursuant to the terms of his agreement, Mr.
Gurevitch may not have any ownership interest, or participate in any way, in any
venture which competes with us for a period of three years after the termination
of the agreement; provided, however, that we must pay Mr. Gurevitch a fee of
$10,000 annually for each of the three years in consideration for this
non-competition agreement.

We have entered into an agreement with Mr. Perrigo pursuant to which Mr.
Perrigo has agreed to serve as our Vice President of Sales until October 1,
1999. Mr. Perrigo's compensation will include salary at a minimum annual base
compensation rate of $100,000 prior to March 1, 1997 and $150,000 thereafter,
and a car allowance and a standard benefits package.

1997 STOCK INCENTIVE PLAN

INTRODUCTION. We adopted our 1997 Stock Incentive Plan (the "1997 Plan") on
February 11, 1997. The 1997 Plan was approved by our shareholders at our annual
meeting held on March 24, 1997, and the shareholders approved an increase of the
shares issuable under the 1997 Plan at the annual meeting held on July 21, 1998.
The 1997 Plan provides for the grant of stock awards to our directors,
employees, officers and consultants. Subject to adjustment for stock splits,
stock dividends and other similar events, 700,000 shares of our common stock
have been reserved for awards under the 1997 Plan and options to purchase
645,900 shares of common stock have been granted. The Board has approved an
amendment to the 1997 Plan to increase the number of authorized shares under the
plan to

36
<PAGE>
1,200,000 shares and intends to submit this amendment to the plan for approval
at our 1999 annual meeting of stockholders.

The 1997 Plan is administered by the Board of Directors or another committee
of two or more non-employee directors appointed by the Board, each of whom shall
be an "outside director" for purposes of 162(m) of the Internal Revenue Code of
1986, as amended. The committee has the power, subject to, and within the
limitations of, the express provisions of the 1997 Plan to select the persons to
whom awards will be granted, and to determine the terms and conditions of the
awards.

AWARDS. The 1997 Plan authorizes the committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of shares of our common stock or an option, stock
appreciation right or similar right with an exercise or conversion privilege at
a price related to our common stock. Awards under the plan may not be issued at
less than the fair market value of the underlying shares of our common stock.
Awards under the 1997 Plan are not restricted to any specified form or structure
and may include arrangements such as sales, bonuses and other transfers of
stock, stock options, reload stock options and stock appreciation rights. An
award may consist of one such arrangement or two or more such arrangements in
tandem or in the alternative. An award may provide for the issuance of our
common stock for any lawful consideration, including services rendered or, to
the extent permitted by applicable state law, to be rendered. Currently,
Delaware law does not permit the issuance of common stock for services to be
rendered.

An award granted under the 1997 Plan may include a provision conditioning or
accelerating the receipt of benefits, either automatically or in the discretion
of the committee, upon the occurrence of specified events, including a change of
control, an acquisition of a specified percentage of the voting power or a
dissolution, liquidation, merger, reclassification, sale of substantially all of
the property and assets or other significant corporate transaction. Any stock
option granted may be an incentive stock option within the meaning of Section
422 of the Internal Revenue Code or a nonqualified stock option.

An award under the 1997 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award and/or to pay all or part of the recipient's tax withholding obligations
with respect to such issuance, by delivering previously owned shares of our
capital stock or other property, or by reducing the amount of shares or other
property otherwise issuable pursuant to the award.

AMENDMENTS. The committee may amend or terminate the 1997 Plan at any time
and in any manner, subject to the following: (1) no recipient of any award may,
without his or her consent, be deprived thereof or of any of his or her rights
thereunder or with respect thereto as a result of such amendment or termination;
and (2) if any rule or regulation promulgated by the Securities and Exchange
Commission, the Internal Revenue Service or any national securities exchange or
quotation system upon which any of our securities are listed requires that any
such amendment be approved by our stockholders, then such amendment will not be
effective until it has been approved by our stockholders.

FORM S-8 REGISTRATION. We have filed a registration statement under the
Securities Act, and an amendment thereto, to register the 700,000 shares of
Common Stock reserved for issuance under the 1997 Plan.

OPTIONS GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information regarding grants of stock
options made during the fiscal year ended December 31, 1998 to the executive
officers named in the Summary Compensation Table. We did not grant any stock
appreciation rights in 1998.

37
<PAGE>
OPTION GRANTS IN 1998

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE OR MARKET PRICE
OPTIONS FISCAL YEAR ENDED BASE ON DATE EXPIRATION
NAME GRANTED DECEMBER 31, 1998 PRICE ($/SH) OF GRANT (1) DATE
- ---------------------------------------- ----------- ----------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Robert H. Gurevitch..................... 40,000 12.39% $ 4.00 * 10/08/2008
Dewey Perrigo........................... 20,000 6.19% $ 4.00 * 10/08/2008
Stephen F. Ross......................... 35,000 10.84% $ 4.25 * 08/04/2008
Merle Roberts........................... 20,000 6.19% $ 4.00 * 10/08/2008
</TABLE>

- ------------------------

* Unless otherwise indicated, all options were granted at fair market value on
the date of grant in accordance with our 1997 Stock Incentive Plan. Fair
market value is the average of the bid and ask price for the Common Stock on
the trading day prior to grant on the Nasdaq SmallCap Market

The following table sets forth, for those named executive officers who held
stock options at fiscal year end, certain information regarding the number of
shares of our common stock underlying stock options held at fiscal year end, and
the value of options held at fiscal year end based upon the closing market price
of our common stock at December 31, 1998 on the Nasdaq SmallCap Market.

AGGREGATE FISCAL YEAR END OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING OPTIONS
SHARES UNEXERCISED OPTIONS AT AT DECEMBER
ACQUIRED ON VALUE DECEMBER 31, 1998 31, 1998
EXERCISE REALIZED ------------------------------ -----------
NAME (#)(1) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------- --------------- ------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>

Robert H. Gurevitch........................ -- -- 15,120 80,000 $ 35,514

Dewey Perrigo.............................. -- -- 39,133 40,000 123,845

Stephen F. Ross............................ -- -- -- 35,000 --

Merle Roberts.............................. -- -- 22,066 40,000 65,047

NAME UNEXERCISABLE
- ------------------------------------------- -------------
<S> <C>
Robert H. Gurevitch........................ $ 124,500
Dewey Perrigo.............................. 72,500
Stephen F. Ross............................ 74,375
Merle Roberts.............................. 72,500
</TABLE>

- ------------------------

(1) No options were exercised in fiscal year 1998.

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY

Our Amended and Restated Certificate of Incorporation eliminates the
liability of our directors for monetary damages for breach of their fiduciary
duty as directors, except for:

- breach of the director's duty of loyalty to us or our stockholders;

- acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law;

- willful or negligent declaration of an unlawful dividend, stock purchase
or redemption; and

- transactions from which the director derived an improper personal benefit.

The Amended and Restated Certificate of Incorporation also provides that we
will indemnify our officer, directors and other eligible persons to the fullest
extent permitted under the laws of the State of Delaware. We have also entered
into indemnity agreements with each of our current directors and certain of our
executive officers which will provide for indemnification of, such persons to
the maximum extent permitted under the laws of the State of Delaware, including
by reason of action or

38
<PAGE>
inaction occurring in the past and circumstances in which indemnification is
discretionary under Delaware law.

We believe that it is the position of the Securities and Exchange Commission
that, insofar as the foregoing provisions may be invoked to disclaim liability
for damages arising under the Securities Act of 1933, the provisions are against
public policy as expressed in the Securities Act of 1933 and are, therefore,
unenforceable.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In October 1996, we entered into an agreement with Boston Marketing Company,
Ltd. pursuant to which we obtained worldwide marketing rights in the dental
market for the CCU processor and the CCD chip used in our company's TeliCam
System as well as the right to use the "TeliCam" trademark. At the time we
entered into this agreement, Hiroki Umezaki was an officer, Director and
principal stockholder of ours and was a substantial stockholder and the
President of Boston Marketing. Mr. Umezaki is no longer an affiliate or a
director. At December 31, 1998, we owed Boston Marketing approximately $228,600
in connection with Teli units purchased by us prior to that date. During the
year ended December 31, 1998, we purchased 2,970 Teli units at an aggregate cost
of $2,325,925 from Boston Marketing. In addition, we had an agreement with Mr.
Umezaki pursuant to which he was to receive a 15% commission on all sales made
by us in Asia, except Japan in which his commission was to be 12%. This
agreement resulted in Mr. Umezaki earning $35,792 in commissions for the year
ended December 31, 1998. This agreement has been amended to provide that Mr.
Umezaki will receive a 12% commission on sales made in Japan only.

From December 1995 through February 1996, Robert H. Gurevitch, our Chairman
of the Board and Chief Executive Officer, and Boston Marketing, an affiliate of
Mr. Umezaki, each loaned to us $177,015 and $200,000, respectively. The
promissory notes evidencing such loans bear interest at 6% per annum and were
originally payable within six months. On February 26, 1996, we repaid $50,000 to
each of Mr. Gurevitch and Boston Marketing. In November 1996, Mr. Gurevitch and
Boston Marketing each agreed to extend the term of their respective notes. On
May 23, 1997, Boston Marketing was paid the remaining principal balance of its
loan plus the accrued interest of $3,526. Mr. Gurevitch was paid $25,000 on July
10, 1997; $26,850 on October 22, 1997; $5,000 on October 30, 1997; $13,787 on
November 1, 1997; $3,447 on December 1, 1997; $3,447 on January 1, 1998; $5,319
on February 1, 1998; $12,806 on February 19, 1998; $3,447 on April 1, 1998;
$1,341 on May 1, 1998; $3,512 on May 18, 1998; $3,976 on June 3, 1998; $81 on
June 17, 1998; and the balance was paid during the third quarter of 1998.

Mr. Gurevitch and Mr. Umezaki have guaranteed our performance under our
leases for our Irvine and Westlake premises. We intend to attempt to obtain
releases from the recipients of each of these guarantees and it is possible that
the elimination of the availability of these guarantees may require us to post
collateral or incur increased expense.

On May 27, 1997, we loaned approximately $126,000 to Dewey Perrigo, our VP
of Sales, and Andrea Niemiec-Perrigo, an employee of ours, for the purposes of
buying a home. The promissory notes evidencing such loan bear interest at prime
plus .25% (8.0%) at December 31, 1998 and are due and payable on May 27, 1999.
On August 19, 1998, a principal payment of $56,000 and an interest payment of
$6,152 were made leaving a loan balance of $70,000.

On March 2, 1998, our Board of Directors entered into an agreement with
accredited investors and institutional purchasers for the private placement of
our 12% senior subordinated notes due 1999 and 450,000 warrants. The debt
placement was consummated on March 19, 1998. J. Steven Emerson purchased
$1,000,000 aggregate principal amount of the notes and 100,000 of our common
stock purchase warrants in the debt placement. Prior to the debt placement, J.
Steven Emerson was the beneficial owner (determined in accordance with Rule
13d-3 of the Exchange Act) of approximately

39
<PAGE>
4.94% of our common stock. J. Steven Emerson is the beneficial owner, (as
determined in accordance with Rule 13d-3 of the Exchange Act) of approximately
8.4% of our common stock.

We have adopted a policy whereby all future transactions between us and our
officers, directors, principal stockholders or affiliates will be approved by a
committee of the Board of Directors, a majority of the members of which will be
independent directors, or, if required by law, a majority of disinterested
directors, and will be on terms no less favorable to us than could be obtained
in arm's length transactions from unaffiliated third parties.

40
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 15, 1999, and as adjusted for our sale
of 2,000,000 shares of our common stock offered by this prospectus and assumes
no exercise of the over-allotment option granted to the underwriters, for:

- each person who is known to us to be the beneficial owner of more than 5%
of our outstanding common stock,

- each of our directors,

- each of our named executive officers, and

- all of our directors and executive officers as a group.

Except as may be indicated in the footnotes to the table and subject to
applicable community property laws, each of such persons has the sole voting and
investment power with respect to the shares owned. Unless otherwise indicated,
the address for each of the principal stockholders is c/o of Dental/ Medical
Diagnostic Systems, Inc., 200 N. Westlake Boulevard, Suite 202, Westlake
Village, California 91362.

<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(1)
NUMBER OF SHARES --------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
- ------------------------------------------------------------------------ ----------------- ----------- -------------
<S> <C> <C> <C>
Robert H. Gurevitch(3).................................................. 895,498 16.4% 12.0%
Marvin Kleinberg(4)..................................................... 12,750 * *
Dewey Perrigo(5)........................................................ 125,464 2.3% 1.7%
Jack D. Preston(6)...................................................... 32,280 * *
Merle Roberts(7)........................................................ 47,066 * *
Stephen F. Ross(8)...................................................... 4,500 * *
John Khademi............................................................ 0 * *
J. Steven Emerson(9).................................................... 470,100 8.4% 6.2%
1056 Ilona Avenue
Los Angeles, CA 90064
All of the directors and executive officers as a group (7
persons)(10).......................................................... 1,117,558 20.1% 14.8%
</TABLE>

- ------------------------

* Less than 1%.

(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Pursuant to the rules of the Securities and Exchange
Commission, shares of common stock which an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be beneficially
owned and outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.

(2) Assumes no exercise of the underwriters' over-allotment option.

(3) Includes 15,120 shares of common stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 23,
1999.

(4) Includes 8,750 shares of common stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 23,
1999.

40
<PAGE>
(5) Includes 39,133 shares of common stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 23,
1999.

(6) Includes 21,780 shares of common stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 23,
1999.

(7) Includes 22,066 shares of common stock underlying options, and 20,000 shares
of common stock underlying warrants, which were exercisable on or which will
become exercisable within 60 days of April 23, 1999.

(8) Includes 4,500 shares of common stock underlying the redeemable common stock
purchase warrants which were exercisable on or which will become exercisable
within 60 days of April 23, 1999.

(9) Includes 100,000 shares of common stock underlying common stock purchase
warrants issued in the debt placement and 78,000 shares of common stock
underlying an aggregate of 78,000 of our redeemable common stock purchase
warrants which were exercisable on or which will become exercisable within
60 days of April 23, 1999. See Item 12 "Certain Relationships and Related
Transactions."

(10) Includes 106,849 shares of common stock underlying options, and 24,500
shares of common stock underlying redeemable common stock purchase warrants,
which were exercisable on or which will become exercisable within 60 days of
April 23, 1999.

41
<PAGE>
SELLING STOCKHOLDER

In order to cover any over-allotments, the underwriters have been granted an
option to purchase up to an aggregate total of 200,000 additional shares of our
common stock from us and/or Robert H. Gurevitch, our Chairman and Chief
Executive Officer. After underwriting fees and expenses, any proceeds earned
from the sale of Mr. Gurevitch's shares of common stock in this offering will be
paid directly to Mr. Gurevitch. Prior to this offering, Mr. Gurevitch
beneficially owned an aggregate of 895,498 shares of our common stock, or 16.4%
of our outstanding common stock. Following the sale of the 2,000,000 shares
offered in this offering, assuming no exercise of the over-allotment option, Mr.
Gurevitch will be the beneficial owner of 12.0% of our outstanding common stock.
If the over-allotment option is exercised in full by the underwriters and solely
from Mr. Gurevitch, following the offering, Mr. Gurevitch will beneficially own
695,498 shares of our common stock, or 9.1% of our then outstanding common
stock.

42
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Pursuant to our Certificate of Incorporation, we are authorized to issue
20,000,000 shares of common stock, par value $.01 per share, and 1,000,000
shares of preferred stock, par value $.01 per share. As of the date of this
prospectus, there were 5,435,694 shares of our common stock outstanding. Upon
completion of this offering there will be 7,435,694 outstanding. There are no
shares of our preferred stock outstanding. The following statements are brief
summaries of certain provisions relating to our capital stock.

COMMON STOCK

The holders of our common stock are entitled to one vote for each share held
of record on all matters on which the holders of our common stock are entitled
to vote. There are no cumulative voting rights with respect to the election of
directors or for any other purpose. The holders of common stock are entitled to
receive ratably dividends when, as and if declared by the Board of Directors out
of funds legally available therefor. In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled subject to
the rights of holders of preferred stock issued by us, if any, to share ratably
in all assets remaining available for distribution to them after payment of
liabilities and after provision is made for each class of stock, if any, having
preference over the common stock.

The holders of common stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by us. There are no redemption
or sinking fund provisions applicable to our common stock. The outstanding
shares of common stock are, and the common stock issuable pursuant to this
prospectus will be, when issued, fully paid and nonassessable.

PREFERRED STOCK

Our Board of Directors has the authority to issue the authorized and
unissued preferred stock in one or more series with such designations, rights
and preferences as it may determine from time to time. Accordingly, the Board of
Directors is empowered, without shareholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights which adversely
affect the voting power or other rights of the holders of our common stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a way of discouraging, delaying or preventing an acquisition
or change in our control. We do not currently intend to issue any shares of our
preferred stock.

OPTIONS

As of the date this prospectus, our Board of Directors has granted options
covering an aggregate of 894,806 shares of common stock to our directors,
officers, consultants and employees, with a weighted average exercise price of $
4.15 per share 645,900 of which were granted under our 1997 Stock Incentive
Plan. Such options typically vest over a three to five year period. See "1997
Stock Incentive Plan."

WARRANTS

As of April 15, 1999 there are currently redeemable common stock purchase
warrants covering an aggregate of 3,850,000 shares of common stock outstanding.
The warrants were issued in registered form pursuant to the terms of a warrant
agreement dated as of May 8, 1997 between us and American Stock Transfer and
Trust Company, New York, New York, as warrant agent. Reference is made to the
warrant agreement (which was filed as an Exhibit to our Registration Statement
dated May 9, 1997) for a complete description of the terms and conditions
thereof. The description herein is qualified in its entirety by reference to the
warrant agreement.

Unless previously redeemed, each redeemable common stock purchase warrant
(including the warrants converted from the bridge warrants) entitles the
registered holder thereof to purchase one

43
<PAGE>
share of common stock at any time during the four-year period commencing on May
9, 1998, at a per share price equal to $5.00 subject to adjustment in certain
circumstances.

Unless extended by us at our discretion, the warrants will expire at 5:00
p.m., New York time, on May 9, 2002. In the event a holder of the warrants fails
to exercise the warrants prior to their expiration, the warrants will expire and
the holder thereof will have no further rights with respect to the warrants.

We may, with the prior written consent of our underwriter from our initial
public offering in May 1997, redeem the warrants at any time once they become
exercisable, for a redemption price of $.01 per warrant if notice of not less
than 30 days is given and the last sale price of our common stock has been at
least 190% of the then current exercise price of the warrants on each of the ten
consecutive trading days ending on the third day prior to the day on which
notice is given. The warrants will be exercisable until the close of business on
the date fixed for redemption.

We will be able to issue the shares of our common stock upon exercise of the
warrants only if there is then a current prospectus relating to such common
stock, and only if such common stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the warrants reside. Although we have filed and
intend to keep current the prospectus which will permit the exercise of the
warrants and qualify for sale the shares of common stock underlying the warrants
in those states in which the securities are to be offered until the expiration
of the warrants, subject to the terms of the warrant agreement, there can be no
assurance that we will be able to keep the prospectus current.

The exercise price and number of shares of common stock or other securities
issuable on exercise of the warrants are also subject to adjustment in the event
of a stock dividend, stock split, recapitalization, reorganization, or merger or
consolidation or other similar event.

The warrants may be exercised upon surrender of the warrant certificate on
or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to us) to the warrant agent for the number of warrants
being exercised. We are required to keep available a sufficient number of
authorized shares of the common stock to permit exercise of the warrants. The
warrant holders do not have the rights or privileges of the holders of common
stock prior to exercise of the warrants.

Also as of April 15, 1999, there are outstanding warrants to purchase
450,000 shares of our common stock which were issued in our debt placement in
March 1998. The debt placement was consummated on March 19, 1998. The warrants
are exercisable commencing on May 15, 1998, and for five years thereafter for
the purchase of one share of common stock per warrant; and at an exercise price
of $5.812 per share.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER EFFECTS

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

TRANSFER AGENT

American Stock Transfer & Trust Company, New York, New York, is the transfer
agent and registrar for our common stock and warrant agent for the redeemable
warrants.

44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

SHARES OUTSTANDING AND FREELY TRADEABLE AFTER OFFERING. Upon completion of
this offering, we will have approximately 7,435,694 shares of common stock
outstanding not including shares issuable upon exercise of outstanding options
and warrants. The 2,000,000 shares to be sold by us in this offering will be
freely tradeable without restriction or limitation under the Securities Act,
except for any such shares held by any of our "affiliates", as such term is
defined under Rule 144 of the Securities Act. Shares held by affiliates will be
subject to the resale limitations under Rule 144. Of the remaining outstanding
shares, approximately 250,000 shares are "restricted securities" within the
meaning of Rule 144 and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. All of these restricted shares of common stock
will become eligible for resale under Rule 144 commencing March 1, 2000. Our
directors and our principal stockholders, who collectively hold an aggregate of
894,878 shares, have agreed not to sell, directly or indirectly, any shares
owned by them for a period of six months after the date of the completion of
this offering. Upon the expiration of this six month lock-up period, all of
these shares will become eligible for sale subject to the restrictions of Rule
144 applicable to our affiliates.

Additionally, the up to 3,850,000 shares of common stock issuable upon
exercise of our outstanding redeemable stock purchase warrants and the up to
450,000 shares of common stock issuable upon exercise of outstanding warrants
issued in our debt placement in March 1998, are covered by registration
statements previously declared effective by the Securities Exchange Commission
and, upon issuance, are expected to be freely tradeable without restriction
under the Securities Act.

RULE 144. In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year, including an affiliate, would be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of 1%
of the then-outstanding shares of common stock (approximately 74,000 shares
after this offering) and the average weekly trading volume in the common stock
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the Securities and Exchange Commission, provided
certain manner of sale and notice requirements and requirements as to the
availability of current public information about us are satisfied. In addition,
our affiliates must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
common stock. As defined in Rule 144, an "affiliate" of an issuer is a person
who, directly or indirectly, through the use of one or more intermediaries
controls, or is controlled by, or is under common control with, such issuer.
Under Rule 144(k), a holder of "restricted securities" who is not deemed an
affiliate of the issuer and who has beneficially owned shares for at least two
years would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above.

FORM S-8 REGISTRATION OF OPTIONS. We have filed a registration statement on
Form S-8 covering the shares of common stock that have been reserved for
issuance under our 1997 Stock Incentive Plan, which permits the resale of such
shares in the public market.

EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK. We are unable
to estimate the number of shares that may be sold in the future by our existing
stockholders or the effect, if any, that such sales will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock, or the prospect of such sales, could adversely affect
the market price of the common stock.

45
<PAGE>
UNDERWRITING

The underwriters for this offering are Bank Brussels Lambert and Quartz
Capital Partners Limited. According to the terms and conditions of our mandate
agreement with the lead underwriter, Bank Brussels Lambert, an underwriting
agreement will be entered into upon closing of this offering. Any underwriting
will take place at this offering price less the underwriting fees set forth on
the cover page of this prospectus.

The mandate agreement provides that the obligations of the underwriters are
subject to certain conditions, including the absence of any material adverse
change in our business and the receipt of certain certificates, opinions and
letters from us, our counsel and independent auditors.

The underwriters are obligated to purchase all of the 2,000,000 shares
offered in this offering. Under the assumption that the offering is successful,
the underwriters will not hold any more shares than that are necessary to
organize a market in the shares as market maker.

The underwriters have advised us that they propose to offer a portion of our
shares offered in this offering to the public in Belgium at the offering price
set forth on the cover page of this prospectus. The underwriters have also
advised us that they propose to offer the remaining portion of our shares
offered in this offering in private placements in and outside of Belgium,
excluding the United States, Canada and Japan, at the offering price set forth
on the cover page of this prospectus. After the offer, the underwriter may
change the offering price and other selling terms.

Each of the underwriters is expected to undertake to comply with certain
offering and selling restrictions in all relevant jurisdictions. In particular,
each underwriter will represent, warrant and agree that (a) it has not offered
or sold and, prior to the expiry of the period of six months from the date of
closing under the underwriting agreement, and will not offer or sell until six
months after such date, any shares to persons in the United Kingdom, except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulation 1995; (b) it has complied and will comply
with all applicable provisions of the Financial Services Act (1986) with respect
to anything done by it in relation to the shares offered in this offering in,
from or otherwise involving, the United Kingdom; and (c) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the shares offered in this
offering to a person who is of a kind described in Article 11(3) of the
Financial Services Act (1986) (Investment Advertisements) (Exemptions) Order
(1996), as amended, or is a person to whom such document may otherwise lawfully
be issued or passed on.

The underwriters have been granted an option, exercisable not later than 30
days from the first day of trading of our shares on Easdaq, to purchase up to an
aggregate total of 200,000 additional shares of common stock from us and/or the
selling stockholder to cover any over-allotments, at the offering price less the
selling fees shown below and set forth on the cover page of this prospectus. If
the underwriters choose to exercise this option, they will be obligated to
purchase the additional shares of common stock, and we or the selling
stockholder will be obligated to sell those shares to the underwriters. The
proportional share of the underwriters' over-allotment option to be sold by us
and/or the selling stockholder shall be determined among us and the selling
stockholder. Any of the shares sold by us in connection with the over-allotment
option will come from our company treasury stock. The underwriters may exercise
this option only to cover over-allotments made in connection with the sale of
common stock offered in this prospectus. If the underwriters exercise the
option, it will offer the additional shares on the same terms as those on which
it is offering the 2,000,000 shares of common stock.

46
<PAGE>
The following table is a summary of the fees that we have agreed to pay the
underwriter:

<TABLE>
<CAPTION>
TOTAL
----------------------------
<S> <C> <C> <C>
WITHOUT WITH
PER SHARE OVERALLOTMENT OVERALLOTMENT
------------- ------------- -------------

Management Fee.......................................................... $ .11 $ 220,000 $ 242,000

Underwriting Fee........................................................ $ .11 $ 220,000 $ 242,000

Selling Fee............................................................. $ .33 $ 660,000 $ 726,000
</TABLE>

As described in the underwriting agreement, we have agreed to reimburse the
underwriter for its out-of-pocket expenses up to US$100,000 and to indemnify the
underwriter against certain liabilities, including liabilities under the
Securities Act. We have been advised that in the opinion of the Securities and
Exchange Commission our indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that the
underwriter asserts a claim for indemnification against those liabilities, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of competent jurisdiction the question
whether our indemnification is against public policy as expressed the Securities
Act. We will be bound by the final adjudication of that matter.

In connection with this offering, the underwriter and its affiliates may
engage in transactions on Nasdaq or Easdaq that stabilize, maintain or otherwise
affect the market price of our common stock. For Nasdaq, these transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M. Under Regulation M, the underwriter and its affiliates may bid for
or purchase our common stock for the purpose of stabilizing its market price.
The underwriter also may create a short position for its own account by selling
more of our common stock in connection with this offering than it is committed
to purchase from us, and in such case may purchase our common stock in the open
market following completion of this offering to cover all or a portion of its
short position. The underwriter may also cover all or any portion of such short
position, up to 200,000 shares of common stock, by exercising its over-allotment
option referred to above.

In connection with this offering, the underwriter and its affiliates who are
qualified registered market on Nasdaq may engage in passive market making
transactions in our common stock on Nasdaq in accordance with Rule 103 of
Regulation M, during a specified period before the commencement of offers or
sales of our common stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered below the
passive market marker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.

Any of the transactions described in the preceding two paragraphs may result
in the maintenance of the price of our common stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in the preceding paragraph are required, and if such transactions are
undertaken, they may be discontinued at any time.

47
<PAGE>
LEGAL MATTERS

Our counsel, Troop Steuber Pasich Reddick & Tobey, LLP, located in Los
Angeles, California, have rendered an opinion to the effect that the common
stock offered by us upon sale will be duly and validly issued, fully paid and
non-assessable. De Bandt van Hecke & Lagae Linklaters & Alliance, have acted as
counsel to our underwriters in connection with certain legal matters relating to
this offering.

EXPERTS

Our financial statements at December 31, 1997 and 1998 and for the years
ended December 31, 1997 and 1998 and the ten month period ended December 31,
1996, appearing in this prospectus and the registration statement of which this
prospectus is part have been audited by PricewaterhouseCoopers, LLP, independent
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended and in accordance with the Act, file reports, proxy or
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the following regional offices: Seven World Trade Center, New
York, New York 10048, and Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.

We have filed with the Commission, a registration statement on Form SB-2
under the Securities Act of 1933 with respect to the common stock being offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to us and our common stock offered hereby, reference is made to the
registration statement, and such exhibits and schedules. A copy of the
registration statement, and the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
at the addresses set forth above, and copies of all or any part of the
registration statement may be obtained from such offices upon payment of the
fees prescribed by the Commission. In addition, the registration statement may
be accessed at the Commission's Web site. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference.

48
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Accountants.......................................................................... F-2

Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.................................. F-3

Consolidated Statements of Operations for the Fiscal Years ended December 31, 1998 and 1997 and for the
Ten-Month Period ended December 31, 1996................................................................. F-4

Consolidated Statements of Stockholders' Equity for the Fiscal Years ended December 31, 1998 and 1997 and
for the Ten-Month Period ended December 31, 1996......................................................... F-5

Consolidated Statements of Cash Flows for the Fiscal Years ended December 31, 1998 and 1997 and for the
Ten-Month Period ended December 31, 1996................................................................. F-6

Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years ended December 31, 1998 and
1997 and for the Ten-Month Period ended December 31, 1996................................................ F-7

Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Dental/Medical Diagnostic Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, cash flows and
comprehensive income (loss) present fairly, in all material respects, the
financial position of Dental/Medical Diagnostic Systems, Inc. and its
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the fiscal years ended December 31,
1998 and 1997 and for the ten month period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of our management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers, LLP

Woodland Hills, CA
February 5, 1999, except for subsequent events
described in Note 19, as to which the date is
March 18, 1999.

F-2
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 3,941,305 $ 3,981,062
Accounts receivable, less allowance for doubtful accounts of $20,975 at both
December 31, 1998 and 1997..................................................... 3,757,865 1,967,614
Inventories...................................................................... 5,559,751 2,896,270
Prepaid expenses and other current assets........................................ 1,332,427 389,061
Debt issuance costs, net of accumulated amortization............................. 64,516 --
------------- -------------
Total current assets....................................................... 14,655,864 9,234,007
Property and equipment, net of accumulated depreciation.......................... 996,940 553,119
Intangible assets, net of accumulated amortization............................... 798,437 86,950
Loans to related parties......................................................... 70,000 126,000
Other assets..................................................................... 49,119 491,950
------------- -------------
Total assets............................................................... $ 16,570,360 $ 10,492,026
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations..................................... $ 22,440 $ 23,356
Notes payable.................................................................... 4,277,505 --
Notes payable to related parties................................................. -- 45,030
Borrowings under line of credit.................................................. 114,630 --
Accounts payable................................................................. 2,413,767 1,522,412
Accrued liabilities.............................................................. 1,240,064 1,017,173
Customer deposits................................................................ 60,833 42,995
------------- -------------
Total current liabilities.................................................. 8,129,239 2,650,966
Borrowings under line of credit.................................................. 229,260 --
Capital lease obligations........................................................ 22,935 39,858
Other long term liabilities...................................................... 15,061 11,052
------------- -------------
Total liabilities.......................................................... 8,396,495 2,701,876
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; none
issued and outstanding....................................................... -- --
Common stock, par value $.01 per share; 20,000,000 shares authorized; 5,255,694
and 5,115,777 shares issued and outstanding at December 31, 1998 and 1997.... 52,556 51,157
Additional paid in capital..................................................... 13,469,597 11,271,784
Accumulated translation adjustment............................................. 1,205 --
Accumulated deficit............................................................ (5,349,493) (3,532,791)
------------- -------------
Total stockholders' equity................................................. 8,173,865 7,790,150
------------- -------------
Total liabilities and stockholders' equity................................. $ 16,570,360 $ 10,492,026
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
---------------------------- DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 19,227,798 $ 16,087,208 $ 11,673,102
Cost of sales....................................................... 9,820,882 10,234,206 6,685,464
------------- ------------- -------------
Gross profit...................................................... 9,406,916 5,853,002 4,987,638
Selling, general and administrative expense......................... 8,764,910 6,031,066 4,360,736
Research and development expense.................................... 549,304 1,213,766 322,467
Non-recurring charge................................................ -- 256,250 --
------------- ------------- -------------
Operating income (loss)........................................... 92,702 (1,648,080) 304,435
Interest and other income........................................... (195,532) (205,818) --
Interest expense.................................................... 1,739,693 138,576 57,166
Amortization of debt issuance costs................................. 235,484 76,431 31,548
------------- ------------- -------------
Income (loss) before income taxes and extraordinary item.......... (1,686,943) (1,657,269) 215,721
Provision for income taxes.......................................... 129,759 153,311 78,570
------------- ------------- -------------
Income (loss) before extraordinary item........................... (1,816,702) (1,810,580) 137,151
Extraordinary loss on early extinguishment of debt (net of tax
benefit of $143,511).............................................. -- (234,149) --
------------- ------------- -------------
Net income (loss)............................................. $ (1,816,702) $ (2,044,729) $ 137,151
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per share before extraordinary item:
Basic............................................................. $ (.35) $ (.42) $ .05
Diluted........................................................... (.35) (.42) .05
Earnings (loss) per share after extraordinary item:
Basic............................................................. $ (.35) $ (.47) $ .05
Diluted........................................................... (.35) (.47) .05
Weighted average number of shares:
Basic............................................................. 5,151,614 4,341,498 2,893,298
Diluted........................................................... 5,151,614 4,341,498 3,019,213
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
--------------------- PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- --------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 2, 1996.................. 2,563,318 $ 25,633 $ 1,339,248 $ (1,625,213) -- $ (260,332)
Issuance of common stock for cash, net
of issuance costs................... 422,219 4,222 1,050,281 -- -- 1,054,503
Issuance of warrants for cash......... -- -- 259,103 -- -- 259,103
Issuance of stock options to
nonemployees........................ -- -- 47,200 -- -- 47,200
Net income............................ -- -- -- 137,151 -- 137,151
---------- --------- ------------- ------------- ------ ------------

Balance, December 31, 1996.............. 2,985,537 29,855 2,695,832 (1,488,062) -- 1,237,625
Issuance of common stock for cash, net
of issuance costs................... 2,120,000 21,200 8,509,192 -- -- 8,530,392
Exercise of stock options............. 10,240 102 8,910 -- -- 9,012
Amortization of deferred
compensation........................ -- -- 57,850 -- -- 57,850
Net loss.............................. -- -- -- (2,044,729) -- (2,044,729)
---------- --------- ------------- ------------- ------ ------------

Balance, December 31, 1997.............. 5,115,777 51,157 11,271,784 (3,532,791) -- 7,790,150
Issuance of common stock for
distribution rights................. 100,000 1,000 461,500 -- -- 462,500
Issuance of warrants with Senior
Subordinated Notes.................. -- -- 1,619,755 -- -- 1,619,755
Exercise of stock options............. 39,917 399 116,558 -- -- 116,957
Net loss.............................. -- -- -- (1,816,702) -- (1,816,702)
Translation adjustment................ -- -- -- -- 1,205 1,205
---------- --------- ------------- ------------- ------ ------------

Balance, December 31, 1998.............. 5,255,694 $ 52,556 $ 13,469,597 $ (5,349,493) $ 1,205 $ 8,173,865
---------- --------- ------------- ------------- ------ ------------
---------- --------- ------------- ------------- ------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, TEN MONTHS ENDED
---------------------- DECEMBER 31,
1998 1997 1996
---------- ---------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $(1,816,702) $(2,044,729) $ 137,151
Adjustments to reconcile net income (loss) to net cash used by
operating activities;
Depreciation and amortization...................................... 338,462 92,993 108,047
Amortization of debt issue costs................................... 235,484 -- --
Amortization of debt discount...................................... 1,271,790 -- --
Allowance for doubtful accounts.................................... -- (86,428) 79,123
Inventory write down............................................... 156,620 29,205 20,822
Extraordinary item................................................. -- 377,660 --
Amortization of deferred compensation.............................. -- 57,850 --
Deferred taxes..................................................... -- 90,000 (90,000)
Deferred rent...................................................... 4,009 (3,046) 1,469
Common stock and stock options issued for services................. -- -- 47,200
Changes in operating assets and liabilities:
Accounts receivable.............................................. (1,782,471) (722,742) (1,188,544)
Inventories...................................................... (2,818,298) (1,412,400) (461,812)
Prepaid expenses and other current assets........................ (941,706) (180,509) (55,567)
Other assets..................................................... 442,831 (449,680) (6,230)
Accounts payable................................................. 889,808 433,080 (448,316)
Accrued liabilities and income taxes payable..................... 220,725 538,430 441,052
Customer deposits................................................ 17,838 9,388 (215,738)
---------- ---------- -----------------
Net cash used by operating activities.......................... (3,781,610) (3,270,928) (1,631,343)
---------- ---------- -----------------
Cash flows from investing activities:
Loans to related parties........................................... 56,000 (126,000) --
Purchase of intangible assets...................................... (304,494) (86,950) --
Purchase of property and equipment................................. (722,056) (284,082) (200,686)
---------- ---------- -----------------
Net cash used in investing activities.......................... (970,550) (497,032) (200,686)
---------- ---------- -----------------
Cash flows from financing activities:
(Decrease) increase in book overdraft.............................. -- -- (49,906)
Accounts payable to related party in excess of terms............... -- -- (79,218)
Issuance of common stock, net of offering costs.................... -- 8,530,392 1,054,503
Proceeds from exercise of stock options............................ 116,957 9,012 --
Repayment of bridge loan........................................... -- (1,600,000) --
Proceeds from issuance of notes payable............................ 4,625,509 -- 1,314,766
Debt issuance costs................................................ (300,000) -- --
Proceeds from line of credit....................................... 343,890 -- --
Proceeds from borrowings from related parties...................... -- -- 25,000
Payments on borrowings from related parties........................ (45,030) (227,936) (29,049)
Principal payments on capital lease obligations.................... (17,839) (21,282) (11,842)
---------- ---------- -----------------
Net cash provided by financing activities...................... 4,723,487 6,690,186 2,224,254
---------- ---------- -----------------
Net increase (decrease) in cash and cash equivalents........... (28,673) 2,922,226 392,225
Effect of exchange rate changes on cash and cash equivalents......... (11,084) -- --
Cash and cash equivalents, beginning of period....................... 3,981,062 1,058,836 666,611
---------- ---------- -----------------
Cash and cash equivalents, end of period............................. $3,941,305 $3,981,062 $ 1,058,836
---------- ---------- -----------------
---------- ---------- -----------------
Supplemental cash flow information:
Interest paid...................................................... $ 310,615 $ 281,693 $ 8,219
Income taxes paid.................................................. 17,553 50,279 --
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for purchase of intangible asset.......... $ 462,500 $ -- $ --
Capital lease obligations incurred................................. -- -- $ 5,997
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31
---------------------------- ------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Net income (loss)..................................................... $ (1,816,702) $ (2,044,729) $ 137,151

Other comprehensive income: foreign currency translation adjustment... 1,205 -- --
------------- ------------- ------------

Comprehensive income (loss)........................................... $ (1,815,497) $ (2,044,729) $ 137,151
------------- ------------- ------------
------------- ------------- ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-7
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The Company designs, develops, manufactures and sells high technology dental
equipment. The Company's primary existing product emphasis is on the manufacture
and sale of a tooth curing and whitening device known as the "Apollo 95E." The
Company also markets and sells a line of whitening products known as "Apollo
Secret" for use in conjunction with the Apollo 95E, and in the second quarter of
1999 intends to introduce a line of composite resin materials known as
"ASAP--Accelerated Solutions for Aesthetic Procedures." In addition, the Company
continues to manufacture and sell intraoral camera systems, known as the
"TeliCam II System," and "TeliCam Elite," and a multi-operatory intraoral camera
system, known as the InTELInet, for use in connection with the TeliCam II System
and TeliCam Elite.

On February 2, 1998 the Company formed "DMDS, Ltd." a wholly owned
subsidiary created under the laws of the United Kingdom. DMDS, Ltd. holds the
assets acquired in 1997 from S.E.D., a company organized under the laws of
France. In addition, the Company is marketing certain of its new products
internationally through DMDS, Ltd.

2. BASIS OF PRESENTATION

On February 5, 1997, the Company changed its fiscal year-end from a fiscal
year ending on the nearest Saturday to February 28th to a December 31 fiscal
year-end. The accompanying consolidated financial statements reflect the
operating results of the Company for the fiscal years ended December 31, 1998
and 1997 and for the ten-month period from March 3, 1996 through December 31,
1996.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of DMDS and its
wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made in the preparation of the
consolidated financial statements relate to the assessment of the carrying value
of accounts receivable, inventories, and estimated provision for warranty costs.
Actual results could differ from those estimates.

RISKS AND UNCERTAINTIES

The Company buys certain key components from one supplier or from a limited
number of suppliers. Although there are a limited number of suppliers of the key
components, management believes that other suppliers could provide similar
components on comparable terms. Changes in key suppliers could cause delays in
manufacturing and distribution of products and a possible loss in sales, which
could adversely affect operating results.

F-8
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has derived substantially all of its revenues from the sale of
two product families. The Company believes that the inability to attract new
customers, the loss of one or more of its major customers, a significant
reduction in business from such customers, or the uncollectibility of amounts
due from any of its larger customers, could have a material adverse affect on
the Company.

REVENUE RECOGNITION

The Company recognizes revenue from the sales of systems and supplies at the
time of shipment, net of an allowance for estimated sales returns. The Company
generally warranties its systems for one year. A provision for estimated future
costs relating to warranty is recorded when systems are shipped.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.

INVENTORIES

Inventories are carried at standard costs which approximate the lower of
actual cost (first-in; first-out) or market. Such amounts include the cost of
materials and, when applicable, labor and overhead.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation.
Capitalized leases are recorded at the lower of fair market value or the present
value of future minimum lease payments, less accumulated amortization.
Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation and amortization of property and equipment sold or
retired are removed from the accounts and the resulting gains or losses are
included in current operations. Depreciation and amortization are provided on a
straight line basis over the estimated useful lives of the related asset, or
with respect to leasehold improvements and capital leases over the primary term
of the lease, whichever is less, as follows:

<TABLE>
<S> <C>
Equipment and software, including capitalized leases............... 5 years
Furniture and fixtures............................................. 7 years
Leasehold improvements and tooling................................. 3 years
</TABLE>

PATENTS, TRADEMARKS AND OTHER INTANGIBLES

Patents, trademarks and other intangibles are carried at cost less
accumulated amortization which is calculated on a straight-line basis over the
estimated useful lives of the assets, not exceeding 15 years. Accumulated
amortization was $59,968 and $0 as of December 31, 1998 and 1997, respectively.

F-9
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS

The carrying value of long-lived assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying values.

ADVERTISING AND PROMOTION COSTS

Production costs of future media advertising and costs of dental industry
trade shows are deferred until the advertising or trade show occurs. All other
advertising and promotion costs are expensed as incurred. Total advertising and
promotion expenses incurred for the fiscal years ended December 31, 1998 and
1997, and for the ten-month period ended December 31, 1996, were $2,256,179,
$1,528,203, and $1,008,879, respectively. Prepaid advertising and promotion
costs at December 31, 1998 and 1997 were $376,316 and $214,667, respectively.

RESEARCH AND DEVELOPMENT COSTS

Costs related to research and development are expensed as incurred.

INCOME TAXES

The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax currently payable for the period and the change
during the period in deferred tax assets and liabilities.

STOCK-BASED EMPLOYEE COMPENSATION AWARDS

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for the Awards of Stock-Based Compensation to Employees" encourages, but does
not require companies to record compensation cost for stock-based compensation
plans at fair value. The Company has adopted the disclosure requirements of SFAS
No. 123, which involves proforma disclosure of net income under SFAS No. 123,
detailed descriptions of plan terms and assumptions used in valuing stock option
grants. The Company has chosen to continue to account for stock-based employee
compensation awards in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Also, at various times throughout the year, cash balances are maintained in
excess of Federally insured deposit limits.

For the fiscal years ended December 31, 1998 and 1997, and for the ten-month
period ended December 31, 1996, international customers accounted for 40%, 24%
and 19% of sales, respectively. At December 31, 1998 and 1997, international
customers accounted for approximately 78% and 57% of accounts receivable,
respectively. No customer accounted for more than 10% of revenues in any of the

F-10
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periods presented. Five customers accounted for 54% of the Company's accounts
receivable at December 31, 1998.

The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Estimated credit losses and
returns have been provided for in the financial statements.

The majority of the Company's current customers consist of dental
professionals and independent distributors. Certain of the dental professionals
lease the Company's products through third party leasing companies. Under the
terms of the sales, the leasing companies have no recourse against the Company.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires disclosure of fair value information about all financial instruments
held by a company except for certain excluded instruments and instruments for
which it is not practical to estimate fair value. The carrying value of the
Company's financial instruments approximates their fair value.

COMPUTATION OF EARNINGS PER SHARE

The Company adopted SFAS No. 128; "Earnings Per Share" for the year ended
December 31, 1997, and has reported earnings per common share for all periods
presented in accordance with the new standard. Net income (loss) per common
share is computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Net income (loss) per
common share assuming dilution is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding plus the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued, using the treasury stock method.
Potential common shares related to stock options and stock warrants are excluded
from the computation when their effect is antidilutive.

COMPREHENSIVE INCOME

In January 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.

No tax effect has been allocated to the foreign currency translation
adjustment for the periods presented.

F-11
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of accumulated other comprehensive income
balance for the year ended December 31, 1998.

<TABLE>
<S> <C>
Beginning balance................................................... $ --
Current period change............................................... 1,205
---------
Ending balance...................................................... $ 1,205
---------
---------
</TABLE>

FOREIGN CURRENCY

Financial statements of foreign subsidiaries are translated in to US dollars
using the exchange rate at the balance sheet date for assets and liabilities and
a weighted average exchange rate for each period for revenues, expenses, gains
and losses. The effect of unrealized exchange rate fluctuations on translating
foreign currency assets and liabilities into US dollars are accumulated as a
separate component of shareholders' equity. Gains (losses) resulting from
foreign currency transactions are included in the statement of operations and
amounted to ($69,726) and $0 for the years ended December 31, 1998 and 1997,
respectively, and $0 for the ten months ended December 31, 1996.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform with current
year presentation.

RECENTLY ISSUED ACCOUNTING STANDARDS

In 1998, the Company adopted SFAS No. 131. "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect the results of operations or financial position but
did affect the disclosure of segment information (see "Segment Information").

4. RELATED PARTY TRANSACTIONS

From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing
Company, Ltd. ("Boston Marketing"), an affiliate of Hiroki Umezaki, a former
Director of the Company, loaned the Company an aggregate of $377,015. The
Promissory Notes evidencing such loans bear interest at 6% per annum and were
originally payable within six months. On February 26, 1996, the Company repaid
$50,000 to each of Mr. Gurevitch and Boston Marketing. In November 1996, Mr.
Gurevitch and Boston Marketing each agreed to extend the term of their
respective notes. On May 23, 1997, Boston Marketing was paid the remaining
principal balance of $150,000 of its loan plus the accrued interest of $3,526.
Mr. Gurevitch was paid $25,000 on July 10, 1997; $26,850 on October 22, 1997;
$5,000 on October 30, 1997; $13,787 on November 1, 1997; and $3,447 on December
1, 1997; $3,447 on January 1, 1998; $5,319 on February 1, 1998; $12,806 on
February 19, 1998; $3,447 on April 1, 1998; $1,341 on May 1, 1998; $3,512

F-12
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. RELATED PARTY TRANSACTIONS (CONTINUED)
on May 18, 1998; $3,976 on June 3, 1998; $81 on June 17, 1998; and the balance
was paid during the third quarter of 1998.

On May 27, 1997, the Company loaned Dewey Perrigo, Vice President of Sales
of the Company, and Andrea Niemiec-Perrigo, an employee of the Company, $126,000
for the purpose of buying a home. The Promissory Notes evidencing such loans
bear interest at prime plus .25% (8.0% at December 31, 1998), and are due and
payable on May 27, 1999. On August 19, 1998, a principal payment of $56,000 and
an interest payment of $6,152 were made leaving a loan balance of $70,000.

5. INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials.................................................... $2,313,810 $1,387,695
Work in process.................................................. 874,002 555,049
Finished goods................................................... 2,371,939 953,526
------------ ------------
$5,559,751 $2,896,270
------------ ------------
------------ ------------
</TABLE>

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Prepaid advertising and industry trade show fees................. $ 376,316 $ 214,667
Prepaid inventory................................................ 220,219 --
VAT recoverable.................................................. 321,254 --
Other............................................................ 414,638 174,394
------------ ------------
$1,332,427 $ 389,061
------------ ------------
------------ ------------
</TABLE>

F-13
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Equipment and software, including $112,853 of capitalized leases
at both December 31, 1998 and 1997............................. $1,128,919 $ 569,729
Furniture and fixtures........................................... 295,360 135,034
Leasehold improvements........................................... 47,251 44,222
------------ ------------
1,471,530 748,985
Less accumulated depreciation and amortization, including $45,142
and $22,571 relating to capitalized leases at December 31, 1998
and 1997....................................................... (474,590) (195,866)
------------ ------------
$ 996,940 $ 553,119
------------ ------------
------------ ------------
</TABLE>

8. INTANGIBLE ASSETS

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Patents and trademarks........................................... $ 395,905 $ 86,950
License agreements............................................... 462,500 --
------------ ------------
858,405 86,950
Less accumulated amortization.................................... (59,968) --
------------ ------------
$ 798,437 $ 86,950
------------ ------------
------------ ------------
</TABLE>

On October 2, 1998, the Company acquired the exclusive worldwide license
agreement for certain tooth whitening products from Chrysalis Dental, Inc.
through the issuance of 100,000 shares of common stock.

F-14
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Accrued commissions.............................................. $ 362,019 $ 223,750
Accrued warranty................................................. 85,000 84,730
Accrued salaries and wages....................................... 84,661 82,112
Accrued interest................................................. 161,488 5,965
Income taxes payable............................................. 124,452 --
Deferred revenue................................................. 32,866 1,200
Accrued advertising.............................................. 78,983 --
Accrued vacation................................................. 64,225 66,911
Accrued development payments..................................... -- 350,000
Other............................................................ 246,370 202,505
------------ ------------
$1,240,064 $1,017,173
------------ ------------
------------ ------------
</TABLE>

10. BORROWINGS UNDER LINE OF CREDIT

On July 1, 1997, the Company finalized a credit agreement with Comerica Bank
("Comerica") extending up to a $2,000,000 line of credit to the Company,
collateralized by a first priority security interest in the Company's assets and
by an assignment of the Company's rights under the Boston Marketing Distribution
Agreement. The credit facility bears interest at the rate of prime plus .25% per
annum (8.00% at December 31, 1998). All borrowings under the facility are
subject to a formula based, generally, on accounts receivable and inventory. No
amounts were outstanding under this line of credit at December 31, 1998.

On December 10, 1997, the Company finalized a second agreement with Comerica
Bank ("Comerica") extending up to a $500,000 line of credit to the Company for
capital expenditures, collateralized by a first priority interest in the
Company's assets. The credit facility bears interest at a rate of prime plus .5%
per annum (8.25% at December 31, 1998). The line expired on December 10, 1998,
at which time the principal balance began to amortize over a thirty-six (36)
month period. Borrowings are at 80% of the capital expenditure. At December 31,
1998, $343,890 was outstanding under this line of credit.

On January 4, 1999, the Company replaced its credit agreements with Comerica
with a $6,950,000 facility with Imperial Bank ("Imperial"). The Imperial
facility comprises a $2,500,000 fixed rate non-revolving line of credit due May
31, 2000; a $4,000,000 variable rate revolving line of credit loan due May 31,
2000; and a $450,000 variable interest rate loan repayable in 16 monthly
installments. The facilities are collateralized by the assets of the Company.
The Company intends to use the credit facilities, when needed, for working
capital, capital expenditures and general corporate purposes. On January 21,
1999, the Company borrowed against the Imperial facility to repay the balance
owing on the Comerica capital credit line of $343,890 plus accrued interest of
$1,120. On January 25, 1999, the Company borrowed against the Imperial facility
to repay the $4,500,000 12% Senior Subordinated Notes plus accrued interest of
$189,000.

F-15
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. NOTES PAYABLE:

Notes payable consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
$4,500,000 12% Senior Subordinated Notes due March 19, 1999, net of unamortized discount of
$348,435.......................................................................................... $4,151,565
Notes payable to certain individuals bearing interest at 12% at December 31, 1998. Due on demand
prior to December 2000............................................................................ 125,940
------------
$4,277,505
------------
------------
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases two facilities under operating leases that expire in 1999
and 2000. The leases require the Company to pay taxes, maintenance fees, and
insurance and provide for periodic increases based on a published price index.
The Company also leases certain equipment under capital leases which expire in
2000 and has the right to purchase the underlying equipment at the termination
of the leases for its fair market value. Rent expense for all operating leases
was approximately $189,000, $132,000 and $102,000 for the fiscal years ended
December 31, 1998 and 1997 and for the ten-month period ended December 31, 1996,
respectively. The two non-cancelable leases are guaranteed by Robert H.
Gurevitch, Chief Executive Officer and Chairman of the Board of the Company.

The aggregate liability for future rentals under lease agreements with
noncancelable lease terms in excess of one year as of December 31, 1998, is
summarized as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31 LEASES LEASES
- ----------------------------------------------------------------------- --------- ----------
<S> <C> <C>
1999................................................................... $ 25,672 $ 76,308
2000................................................................... 22,539 69,949
--------- ----------
48,211 $ 146,257
----------
----------
Less amounts representing:
Interest............................................................. 2,836
Current portion...................................................... 22,440
---------
Long term portion...................................................... $ 22,935
---------
---------
</TABLE>

DISTRIBUTION AGREEMENTS

Effective October 1, 1996, the Company amended its distribution agreement
("BMC Distribution Agreement") with Boston Marketing, a licensed distributor of
the Teli manufactured CCD chip which includes the Teli CCU processor. Pursuant
to the BMC Distribution Agreement, the Company has the exclusive right (i) to
market certain Teli manufactured CCD chip assemblies with CCU processors (model
numbers CS6110 S/B with Frame Grabber, CS6110 P S/B with Frame Grabber and the
CS6110 S/B without Frame Grabber (each a "Teli Unit" and collectively the "Teli
Units")) to the dental market, and (ii) to use the "TeliCam" trademark. The Teli
Units are key components of the Company's

F-16
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
intraoral digital cameras. The BMC Distribution Agreement has a five-year
initial term. The Company has agreed to purchase a minimum of 2,500 Teli Units
per year for each of the five years, at an initial price of $750 per Teli Unit.
The Boston Marketing Distribution Agreement is terminable by Boston Marketing if
the Company fails to meet its annual minimum purchase obligation. The term of
the BMC Distribution Agreement may be extended by mutual agreement of the
Company and Boston Marketing for an additional five year term.

On October 10, 1997, the Company entered into an agreement with Suni Imaging
Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into systems for the dental market. The Company has obtained
exclusive rights to market products to the dental market incorporating certain
digital x-ray technology developed by Suni. Suni will retain the rights to
developed microchip technology underlying the x-ray system it develops for us.
The Company will determine whether or not to proceed with the marketing of such
products based upon the results of the development.

Under the agreement with Suni, the Company was required to pay a non
refundable fee of $875,000 to Suni to develop technology for a digital x-ray
system for the dental market. This non-refundable fee was charged to research
and development expense during the year ended December 31, 1997. If the initial
prototype developed subsystem is not accepted by the Company, the fee is not
refundable to the Company and the Company is under no obligation to pay any
additional development fees or financial penalties to Suni. If the initial
prototype subsystem is accepted by the Company, upon acceptance of the final
prototype subsystem, the Company is obligated to pay an additional development
fee of $375,000. Through December 31, 1998, only the initial portion of the fee
($875,000) has been paid to Suni. The remaining $375,000 is expected to be paid
upon acceptance in 1999 of the final prototype developed subsystem. Under the
terms of the agreement, the Company will also be required to pay a per unit
royalty on each licensed product sold.

On October 2, 1998, the Company entered into an agreement with Chrysalis
Dental, Inc. to acquire the exclusive worldwide license agreement for certain
new tooth whitening products ("New Products"). Pursuant to the terms of the
agreement the Company is required to pay minimum annual royalties of $150,000
during the term of the agreement. Should the Company fail to make the minimum
annual royalty payments after December 31, 2000, the Company shall have the
option to convert the exclusive agreement to a non-exclusive agreement and
thereafter forego payment of the minimum annual royalties. The Company is also
required to pay an earned royalty of 7% on the net sales of the New Products by
the Company in excess of the minimum payments, unless after five years of the
date of agreement no patent has been issued and no application is pending
covering the new products, then the royalty rate will be reduced to 4%.

13. CAPITAL TRANSACTIONS

On May 30, 1996, the Company completed the sale of a total of 422,219 shares
of its common stock to six foreign investors. Each share was sold at a price of
$2.58 per share and, consequently, the Company raised approximately $1,055,000
from the sale, net of related expenses of approximately $34,000.

On November 27, 1996, the Company raised approximately $1,314,000, net of
issuance costs of $285,000, through a private placement of 32 Units to certain
accredited investors. Each Unit consisted of a secured promissory note in the
principal amount of $50,000 ("Bridge Note") and a warrant to

F-17
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. CAPITAL TRANSACTIONS (CONTINUED)
purchase 18,750 shares of Common Stock ("Bridge Warrant") at a purchase price of
$2.67 per share. The Notes bore interest at a rate of 10% per annum and the
principal and all accrued interest were payable upon the earliest to occur of:
(a) May 27, 1998; (b) certain change in control events effecting the Company;
(c) a public offering of the Company's securities; or (d) the sale by the
Company's Chief Executive Officer of all or substantially all of his holdings of
the Common Stock. Upon the happening of certain events the holders of the Notes
had the right to convert the outstanding balances of their Notes into shares of
the Common Stock at a rate of $2.67 per share. The Warrants were first
exercisable on November 27, 1997 and expire on November 27, 2002. As a result of
the warrants, these notes were discounted by $259,103, which amount was being
amortized over the term of the notes. The Bridge Warrants were converted into
1,600,000 Redeemable Common Stock Purchase Warrants upon closing of the
Company's Offering on May 14, 1997.

On May 14, 1997, the Company closed a secondary offering of 2,070,000 shares
of common stock. Each share of common stock included one redeemable warrant to
purchase one share of common stock at a purchase price of $5.00. This offering
resulted in gross proceeds of $10,350,000 less expenses of approximately
$2,075,858 for net proceeds of approximately $8,274,142. In addition, the
underwriter to the secondary offering received an option to purchase 180,000
shares of common stock and/or 180,000 warrants at a purchase price of $4.95 per
share and $0.55 per warrant. Further, approximately $1,600,000 of the net
proceeds were used to repay the principal on the Bridge Notes plus an additional
$100,000 was used to pay off accrued interest. The Bridge Notes consisted of
secured convertible promissory notes in the aggregate principal amount of
$1,600,000 bearing interest at 10% per annum and were payable the earlier of May
27, 1998 or consummation of the offering. The Bridge Warrants were automatically
converted at the date of the secondary offering. Approximately $224,000 was used
to repay loans from related parties. The remaining net proceeds have or will be
used for product development, acquisition, and to repay the remaining loans from
related parties, and working capital and general corporate purposes.

On September 17, 1997, the Company issued 50,000 shares of Common Stock to
DMD NV, the Company's licensed exclusive distributor of the TeliCam system in
Europe, in exchange for termination of DMD NV's exclusive distribution rights in
Europe. The market value of the Common Stock issued was $256,250.

On March 2, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999, and 450,000 warrants
(the "1998 Warrants"). The Debt Placement was consummated on March 19, 1998. The
1998 Warrants are (i) exercisable commencing on May 15, 1998, and for five years
thereafter for the purchase of one share of Common Stock per Warrant; and (ii)
at an exercise price of $5.812 per share. The Senior Subordinated Notes (i) bear
interest payable semi-annually at a rate of 12% per annum; (ii) mature on the
first anniversary of the date of issuance; and (iii) may be repaid by the
Company prior to maturity at one hundred and two (102%) percent of the amount of
the unpaid principal plus interest due as of the date of repayment. As a result
of the warrant issuance, the Senior Subordinated Notes were discounted by
approximately $1,620,000, which is being amortized over the term of the Notes.
On September 16, 1998, accrued interest of $270,000 was paid to the Note holders
in accordance with the Debt Placement agreement. On January 27, 1999, the
Company repaid the Senior Subordinated Notes, in full, plus $189,000 of accrued
interest.

F-18
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. STOCK OPTIONS AND WARRANTS

In March 1997, the Company's Board of Directors approved the "1997 Stock
Incentive Plan." Under the plan, incentive stock options and non-statutory stock
options may be granted to employees, directors, and consultants to purchase a
specified number of shares of common stock at a price not less than the fair
market value on the date of grant and for a term not to exceed 10 years. Options
for employees generally vest over a period of 5 years. The maximum number of
shares authorized for grants of options under the 1997 Stock Incentive Plan at
December 31, 1998 is 700,000.

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for the Company's stock based compensation plans. Had
compensation costs for the Company's stock option plan (for options granted in
the years ended December 31, 1998 and 1997, and in the ten-month period ended
December 31, 1996, only) been determined based upon the methodology prescribed
under SFAS No. 123, the Company's net (loss) would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998: AS REPORTED PRO FORMA
- ---------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Net income/(loss)............................................... $ (1,816,702) $ (2,215,967)
Net income/(loss) per share (basic and diluted)................. $ (.35) $ (.43)

YEAR ENDED DECEMBER 31, 1997: AS REPORTED PRO FORMA
- ---------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Net income/(loss)............................................... $ (2,044,729) $ (2,180,726)
Net income/(loss) per share (basic and diluted)................. $ (.47) $ (.50)
<CAPTION>

TEN-MONTH PERIOD ENDED DECEMBER 31, 1996: AS REPORTED PRO FORMA
- ---------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Net income/(loss)............................................... $ 137,151 $ (158,129)
Net income/(loss) per share (basic and diluted)................. $ .05 $ (.05)
</TABLE>

The fair value of options granted during 1998, 1997 and 1996 is estimated as
$970,215, $1,278,280 and $295,280, respectively, on the dates of grants using
the Black-Scholes option pricing model. The following assumptions were used for
1998, 1997 and 1996: (i) risk-free interest rate of 4.82%, 6.33% and 6.85%,
respectively (ii) expected option life of 5 years, (iii) forfeiture rate of 0,
(iv) expected volatility of 72.6%, 68.73% and 143%, respectively and (v) no
expected dividends.

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996.

F-19
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1998, 1997 and 1996, and the changes during the years ended December 31, 1998
and 1997, and the ten-month period ended December 31, 1996, is presented below:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF OPTION GRANT DATE
SHARES EXERCISE PRICE FAIR VALUE
----------- --------------- -------------
<S> <C> <C> <C>
Outstanding at March 2, 1996.......................... -- $ --
Granted............................................. 139,943 2.63 $ 2.11
Exercised........................................... -- --
----------- -----
Options outstanding at December 31, 1996.............. 139,943 2.63
Granted............................................. 471,691 3.79 2.71
Canceled............................................ (513) 2.95
Exercised........................................... (10,240) .88
----------- -----
Options outstanding at December 31, 1997.............. 600,881 3.63
Granted............................................. 362,950 4.20 2.67
Canceled............................................ (32,108) 4.85
Exercised........................................... (39,917) 2.93
----------- -----
Options outstanding at December 31, 1998.............. 891,806 4.15
----------- -----
----------- -----
Options exercisable at December 31, 1998............ 279,367 $ 3.27
Options available for future grant.................. 54,858
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------
<C> <C> <S> <C> <C> <C>
OPTIONS EXERCISABLE
RANGE OF WEIGHTED AVERAGE ---------------------------------------
EXERCISE NUMBER OUTSTANDING AT REMAINING WEIGHTED AVERAGE NUMBER OUTSTANDING WEIGHTED AVERAGE
PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DECEMBER 31, 1998 EXERCISE PRICE
- ------------- ---------------------- ---------------- ---------------- -------------------- -----------------
$0.88-2.93 178,357 2.25 years $2.34 178,717 $ 2.34
$4.00-4.50 385,950 8.79 years $4.08 36,000 $ 4.50
$5.00-5.875 327,499 8.77 years $5.22 64,650 $ 5.15
------- -------
891,806 279,367
------- -------
------- -------
</TABLE>

The following is a summary of warrants outstanding at December 31, 1998:

<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
UNDER WARRANTS EXERCISE PRICE EXPIRATION DATE
- ------------------------- --------------- ----------------------
<C> <C> <S>
450,000 $ 5.81 May 15, 2003
180,000 5.55 May 14, 2002
2,070,000 5.00 May 14, 2002
1,600,000 5.00 November 27, 2002
----------
4,300,000
----------
----------
</TABLE>

F-20
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. INCOME TAXES

The income tax expense (benefit) for the fiscal years ended December 31,
1998 and 1997, and for the ten-month period ended December 31, 1996 is as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ 113,299 $ 132,570
State.................................................. 1,600 40,012 36,000
Foreign................................................ 128,159 -- --
---------- ---------- ----------
129,759 153,311 168,570

Deferred:
Federal................................................ -- -- (67,000)
State.................................................. -- -- (23,000)
---------- ---------- ----------
Total.................................................... $ 129,759 $ 153,311 $ 78,570
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The Company's effective tax rate for the fiscal years ended December 31,
1998 and 1997, and for the ten-month period ended December 31, 1996 differs from
the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax provision at the statutory rate............................. (34.0)% (34.0)% 34.0%
Nondeductible expenses.......................................... -- 2.0 10.0
State taxes, net of federal benefit............................. (7.1) (6.0) 14.0
Research & development credit................................... -- (5.0) --
Establishment of valuation allowance............................ -- 52.0 --
Increase (reduction) in deferred asset valuation allowance...... 43.2 -- (27.0)
Foreign taxes................................................... 2.3 -- --
Other........................................................... 3.3 0.3 5.0
--------- --------- ---------
7.7% 9.3% 36.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-21
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. INCOME TAXES (CONTINUED)
The components of the net deferred taxes are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred Tax Assets:
Inventory reserves.............................. $ 64,600 $ 39,000 $ 28,300
Warranty accrual................................ 33,900 33,000 22,600
Allowance for doubtful accounts................. 8,300 20,700 37,900
Net operating loss carryforwards................ 1,625,000 1,029,700 --
Research and development credits................ 171,800 100,000 --
Accrued vacation................................ 25,600 24,100 --
Fixed assets.................................... (7,800) 31,400 --
Intangible assets............................... (127,000) -- --
State tax credits............................... (111,500) -- --
Other........................................... 81,500 17,100 1,200
Valuation allowance............................. (1,764,400) (1,295,000) --
------------ ------------ ------------
$ -- $ -- $ 90,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

As a result of the Company's recent loss history, a valuation allowance has
been recorded for the full amount of the Company's deferred tax asset at
December 31, 1998.

The Company has federal tax and state tax net operating loss carryforwards
of $3,852,000 and $3,742,000, respectively, which begin to expire in 2012 and
2002, respectively.

16. EARNINGS PER SHARE

The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for the years ended
December 31, 1998 and 1997, and for the ten-month period ended December 31,
1996:

<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -----------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Basic earnings per share.............................................. $ (1,816,702) 5,151,614 $ (.35)
Effect of dilutive securities--stock options and warrants............. -- -- --
------------- ------------- -----
Diluted earnings per share............................................ $ (1,816,702) 5,151,614 $ (.35)
------------- ------------- -----
------------- ------------- -----
For the year ended December 31, 1997:
Basic earnings per share.............................................. $ (2,044,729) 4,341,498 $ (.47)
Effect of dilutive securities--stock options and warrants............. -- -- --
------------- ------------- -----
Diluted earnings per share............................................ $ (2,044,729) 4,341,498 $ (.47)
------------- ------------- -----
------------- ------------- -----
For the ten months ended December 31, 1996:
Basic earnings per share.............................................. $ 137,151 2,893,298 $ .05
Effect of dilutive securities--stock options and warrants............. -- 125,915 --
------------- ------------- -----
Diluted earnings per share............................................ $ 137,151 3,019,213 $ .05
------------- ------------- -----
------------- ------------- -----
</TABLE>

F-22
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. EARNINGS PER SHARE (CONTINUED)
The computation for diluted number of shares excludes unexercised stock
options and warrants that are anti-dilutive. The number of such shares for the
years ending December 31, 1998 and 1997, and for the ten-month period ended
December 31, 1996 were 5,372,806, 4,580,881 and 830,395, respectively.

17. EXTRAORDINARY ITEM AND NON-RECURRING CHARGE

On May 14, 1997, the Company repaid the $1,600,000 principal amount Bridge
Notes in connection with the Company's Offering. An extraordinary charge of
$234,149 (net of tax benefit of $143,511) was incurred for the early
extinguishment of those notes.

On September 17, 1997, the Company repurchased the exclusive distribution
rights of its products into the European market from an independent distributor
for 50,000 shares of common stock. This resulted in a non-recurring charge of
$256,250.

18. SEGMENT INFORMATION

The Company operates in one segment--dental medical equipment which, at
December 31, 1998, comprised three main products: TeliCam Systems--an intraoral
camera and dental networking system; Apollo 95E tooth whitening and curing
system; and other accessories including the Apollo Secret whitening product.
Accordingly no separate segment information is provided other than Enterprise
Wide disclosures as required by SFAS No. 131.

The following are sales by product lines for the year ended December 31,
1998:

<TABLE>
<CAPTION>
1998
-------------
<S> <C>
Apollo 95E..................................................................... $ 11,125,629
TeliCam........................................................................ 6,555,540
Other.......................................................................... 1,546,629
-------------
$ 19,227,798
-------------
-------------
</TABLE>

Sales for the year ended December 31, 1997 and for the ten-month period
ended December 31, 1996 consisted primarily of TeliCam sales.

The Company ships products from its operations in the US and Europe. The
following are sales by its US and European locations for the years ended
December 31, 1998 and 1997 and the ten-month period ended December 31, 1996:

<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Sales by geography:
United States.............................. $ 13,182,354 $ 16,087,208 $ 11,673,102
Europe..................................... 6,045,444 -- --
------------- ------------- -------------
$ 19,227,798 $ 16,087,208 $ 11,673,102
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

F-23
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SEGMENT INFORMATION (CONTINUED)
The following is long-lived asset information by geographic area as of
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
Long Lived assets:
United States................................................ $ 866,950 $ 553,119
Europe....................................................... 129,990 --
------------- -------------
$ 996,940 $ 553,119
------------- -------------
------------- -------------
</TABLE>

19. SUBSEQUENT EVENTS

On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase price
consisting of 100,000 shares of the Common Stock of the Company. DMD Germany's
sole business was the sale and distribution of the Company's products in
Germany. The assets that DMDS, Ltd. purchased include the business (as a going
concern), customer lists, goodwill, the benefit of the lease and other contracts
with third parties and all other items of whatever nature owned by DMD Germany
and used in the conduct of the business of DMD Germany. Under the terms of the
agreement, if DMD Germany generates greater than (1) $4 million in revenues, or
(2) Apollo and/or TeleCam unit sales of at least 780 units during the first year
under the agreement, the Company shall pay contingent consideration equal to the
difference between $1.6 million and the market value of 100,000 shares of Common
Stock. The Company also entered into an employment agreement with Ralf Muller,
the General Manager of DMD Germany. The Company intends to continue the business
of DMD Germany as currently operated. The Company purchased the assets of DMD
Germany for the purpose of increasing its revenues and the margins on products
sold in Germany.

On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom, for a
purchase price consisting of 50,000 shares of the Common Stock of the Company.
Midas, Ltd.'s primary business was the sale and distribution of the Company's
products in the United Kingdom. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by Midas, Ltd. and used in the conduct of the business of Midas,
Ltd. The Company also entered into a non-compete agreement with Sostre NV, the
entity that has distributed the Company's products for Midas, Ltd. The Company
intends to continue the business of Midas, Ltd. substantially as currently
operated. The Company purchased the assets of Midas, Ltd. for the purpose of
increasing its revenues and the margins on products sold in the UK. No pro forma
financial information has been presented for these two acquisitions as they are
immaterial to the consolidated financial statements of the Company.

On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni will assemble, test and package the Company's digital
x-ray system incorporating the digital x-ray technology developed by Suni for
the Company. The Company is currently working with Suni to produce a digital
x-ray system that meets the Company's specifications. While the Company believes
that an acceptable device will be manufactured, no assurance can be given that
Suni will be able to produce a product which will meet the Company's
specifications. Under the agreement, which has a

F-24
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SUBSEQUENT EVENTS (CONTINUED)
three year term, the Company has guaranteed payment in full for at least 3,000
units per year and has agreed to place orders for at least 750 units per
quarter. The Company has also agreed to fulfill all of its requirements for the
x-ray product from Suni during the term of the agreement. The Company cannot
begin shipping products under this agreement to the domestic market until it
receives 510(k) notification. If, and when, 510(k) notification is received, the
Company intends to begin introducing the digital x-ray system for sale
worldwide.

F-25
<PAGE>
SUPPLEMENTAL EASDAQ INFORMATION

This prospectus supplement contains the additional information that we are
required to provide in connection with dual listings on the Nasdaq National
Market System and the European Association of Securities Dealers Automated
Quotation System in accordance with the Easdaq Rule Book. This prospectus
supplement is to be read in conjunction with the prospectus filed with the
United States Securities and Exchange Commission and the Belgian Banking and
Finance Commission ("COMMISSIE VOOR HET BANK- EN FINANCIEWEZEN/COMMISSION
BANCAIRE ET FINANCIERe") in connection with the offering of 2,000,000 shares of
our common stock and the admission to trading of the shares on Easdaq and the
Nasdaq National Market System.

References in this prospectus supplement to the prospectus shall include the
prospectus supplement unless the context otherwise requires.

APPROVAL BY THE BELGIAN BANKING AND FINANCE COMMISSION--"CBF"

The CBF is reviewing our prospectus for approval in accordance with Article
29ter, Section1 of the Royal Decree no. 185 of July 9, 1935 and Article 11 of
the Royal Decree of October 31, 1991 on the prospectus to be published for
public offers of securities. If approval is given, it will not imply any
judgement on the appropriateness or the merits of this offering, our common
stock nor of the situation of our company or the selling stockholder. The notice
prescribed by Article 29, Section1 of the Royal Decree no. 185 of July 9, 1935
will appear in the financial press on or prior to the date of the start of this
offering.

The public offering of our common stock in Belgium has been authorized by
the Minister of Finance under article 4 of the Law of December 4, 1990 on the
financial transactions and the financial markets.

PUBLICATION OF PRICE SENSITIVE INFORMATION

Companies approved for trading on Easdaq are required to publish relevant
financial information and other information regularly and to keep the public
informed of all events likely to affect the market price of their securities. We
will make price sensitive information available to investors in Europe through
the Easdaq Company Reporting System and other international information vendors.
The EASDAQ rules require that, except in unusual circumstances, we must promptly
disclose to the public any information that would be expected to be price
sensitive or to affect the value of the shares offered in this offering or
influence investors' decisions. We must also notify and provide details to the
EASDAQ Market Authority of the intended disclosure of any such information prior
to its release to the public.

The EASDAQ rules further require that we must provide an annual report,
including audited consolidated financial statements, within three months after
the end of the financial year. The annual report must disclose all material
information relating to us and our subsidiaries. The EASDAQ rules also require
that we must provide unaudited quarterly reports for the first, second and third
quarters of our financial year, within two months after the end of the relevant
quarter.

CERTIFICATE OF INCORPORATION AND FINANCIAL STATEMENTS

Immediately following approval of this prospectus by the CBF we intend to
file our Amended and Restated Certificate of Incorporation (as in effect on the
date of admission for trading on Easdaq of our shares) with the Registry of the
Commercial Court of Brussels, where it will be publicly available.

We filed our consolidated financial statements with the Belgian National
Bank where such statements are publicly available. In accordance with Easdaq
rules, we will provide our audited consolidated financial statements and annual
report within three months after the end of our financial

A-1
<PAGE>
year and an unaudited quarterly report within 45 days after the relevant
quarter. We will also make a copy of our most recent Amended and Restated
Certificate of Incorporation and financial statements available to investors at
the Sales Marketing Office of Dental Medical Diagnostic Systems, Ltd. (Belgium),
Xavier de Cocklaan 68/4, B-9877 Deurle, Belgium.

A summary of our consolidated annual and quarterly financial statements will
also be made available to investors in Europe through the Easdaq Company
Reporting System.

WE ARE RESPONSIBLE FOR THE PROSPECTUS

We accept responsibility for the contents of this prospectus. To the best of
our knowledge, the information contained in the prospectus is factually accurate
in all material respects and there is no omission of any material information
that would materially affect the meaning of any statement contained in the
prospectus.

TRANSFERABILITY OF THE SHARES

The shares of our common stock offered under this prospectus are freely
transferable, fully paid, and nonassessable.

OUR AUDITORS

PricewaterhouseCoopers, LLP are our independent accountants.

TRANSPARENCY RULES

Each legal or natural person who directly or indirectly acquires or disposes
of any of our voting financial instruments, whether or not representing the
capital, is obliged to notify us on a form prescribed by the market suthority of
EASDAQ within five EASDAQ business days from the date of such acquisition or
disposal, in all cases where the proportion of voting financial instruments held
directly or indirectly by such person following the transaction exceeds or falls
below the threshold of five percent or any multiple of five percent of all of
our outstanding voting financial instruments. Failure to make such disclosure
may lead to suspension of the voting rights attached to the relevant ordinary
shares. We shall, within three EASDAQ business days following receipt of the
declaration, notify the market authority on a form prescribed by the market
authority and disclose to the public through the EASDAQ publication means (i.e.,
"The ECR system") an updated schedule setting forth, per class of our voting
financial instruments, the person, entity or group of persons or entities, known
to us to hold at least five percent or more of the voting financial instruments
of such class and the number and percentage of financial instruments held by
such person, entity or group of persons or entities.

THE OFFERING

GENERAL

The shares offered under this prospectus will be offered during the offering
period specified below, as part of a public offering in Belgium and private
placements in and outside Belgium excluding the United States, Canada and Japan.
The offering comprises 2,000,000 shares of common stock to be issued by us
pursuant to a capital increase. We and/or the selling stockholder will grant to
the underwriters an option to acquire up to an additional amount of 200,000
shares to cover over-allotments, if any. See "Over-allotment Option" below.

The 2,000,000 shares offered by us will have the same rights as our
currently issued shares. The shares offered in this offering are expected to be
subscribed and paid for by the underwriters on the

A-2
<PAGE>
closing of this offering with a view to placing the shares immediately
thereafter with the investors to the extent that subscriptions have been
received.

The offering in Belgium will take place by way of a bookbuilding process
from May 21 to May 28, 1999. The lead underwriter in agreement with us will be
entitled to terminate the solicitation of offers to buy shares by curtailing the
offering period without prior notice to the extent permitted by Belgian law. If
there is an early closing it will be announced in the Belgian press the day
following the early closing. Investors who wish to acquire shares in this
offering must complete the application form attached to this prospectus and
submit the form to an authorized intermediary in Belgium.

The bookbuilding procedure is a customary method for determining the price
of shares. The purpose of the bookbuilding procedure is to allow the price for
the shares to be determined by market forces.

Investors wishing to acquire shares may during the offering period submit
bids in which they specify the number of shares which they are willing to
purchase at or up to a specified price. Bids may be submitted to the
underwriters, beginning on May 21, 1999 during normal banking hours, subject to
the right of the underwriters to reject bids in whole or in part, in particular
in the event that the number of shares available is insufficient to satisfy all
the bids made at or above the offering price.

The offering price at which the shares will be offered is expected to be
fixed on May 31, 1999 on the basis of the bids received during the offering
period. If, on the basis of the bids received during the offering period, the
offering price is equal to or less then USD $7.00, the offering may be cancelled
and no underwriting agreement will be signed.

OVER-ALLOTMENT OPTION

In addition to the 2,000,000 shares offered in this offering, the lead
underwriter will be granted by us and the selling stockholder, in a proportion
to be determined between us and the selling stockholder, pursuant to a mandate
agreement which is expected to be executed on April 23, 1999, the option to
purchase up to 200,000 shares in order to cover over-allotments, if any. The
over-allotment option may be exercised within 30 calendar days from the first
day of trading of our shares on Easdaq.

ALLOTMENT OF THE SHARES

In the event that the number of offered shares is insufficient to satisfy
all bids made at or about the offering price, the application shall lead to
apportionment. Allocation of the offered shares to retail investors in Belgium
will be made on the basis of objective allotment rules, determined in agreement
between us and the lead underwriter. The allotment key for the Belgian retail
investors is expected to be published in the Belgian press on .

If the underwriters determine, or have reason to believe, that for a single
investor several orders were submitted, through more than one underwriter, the
underwriters may reduce the allotment.

LOCK-UP AGREEMENTS

We hereby confirm that, with the sole exception of sales by the selling
stockholder upon exercise by the underwriters of the over-allotment option, (1)
all persons who are our directors at the time of the admission to trading of our
common stock on Easdaq and (2) all stockholders (other than the underwriters of
the offering), which, at the time of admission to trading of our common stock on
Easdaq, own more than ten percent of our common stock, have undertaken not to
dispose of any of their shares of common stock for a period of six months
commencing on the first day of trading of our common stock on Easdaq. These
persons' ability to dispose of their shares may also be subject to additional
restrictions contained in the underwriting agreement.

A-3
<PAGE>
APPLICABLE LAW AND JURISDICTION

Belgian law applies to the offering of our shares in Belgium. United States
law is applicable to any relationship between us and our stockholders. Without
prejudice to applicable treaties, any dispute related to this offering in
Belgium shall be finally settled by the Belgian courts. Any dispute related to
the relationship between us and our stockholders will be settled by courts in
the United States.

LISTING

All of our outstanding shares, excluding the shares offered in this
offering, have been admitted for trading on the Nasdaq SmallCap market (and the
shares which will be issued upon exercise of our warrants at their issue). We
are in the process of filing applications for admission to trading on Easdaq and
Nasdaq National Market System of all of our outstanding shares, including the
shares offered in this offering.

COMMENCEMENT OF TRADING ON EASDAQ

The trading of our shares on Easdaq is expected to commence on June 4, 1999.

ANNOUNCEMENTS, PAYING AND DEPOSITORY AGENT

Announcements concerning our shares shall be published in Belgium through
the Easdaq Company Reporting System and, to the extent required by law, in the
Belgian financial press.

In Belgium, Bank Brussels Lambert will act as our paying agent.

The costs for distribution of dividends, if any, will be paid by us. If we
decide to change this decision, it will be announced in the Belgian financial
press.

PAYMENT OF THE OFFER SHARES

The shares offered in this offering must be fully paid by the investors to
the underwriters in Dollars on .

For the tax on securities transactions payable by investors in Belgium: See
"Certain Tax Considerations for Belgian Investors" on page A-6.

DELIVERY OF THE SHARES

Delivery in book-entry form of the shares against payment will be affected
at the closing of this offering through the services of Euroclear or Cedelbank,
Easdaq's settlement agent.

The offered shares will be represented by a global certificate evidencing
the recordation of as DTC's nominee, in our share registry as the owner of
record of all the shares offered in this offering. Shares held on behalf of
Euroclear or Cedelbank participants will be recorded on the books of DTC and
held in the accounts of the respective custodians of Euroclear and Cedelbank.

For more details on Euroclear, Cedelbank and DTC's respective systems, see
"Clearing and Settlement Mechanics" below.

DESIGNATED MARKET MAKERS ON EASDAQ

Bank Brussels Lambert and Quartz Capital Partners Limited will act as market
makers for our shares traded on Easdaq.

A-4
<PAGE>
CLEARING AND SETTLEMENT MECHANICS

Easdaq is a quotation system that became operational in November 1996 (see
"Risk Factors--The Easdaq Market has a limited operating history characterized
by high volatility.") Book-entry form is mandatory for settlement of market
transactions on Easdaq.

Transactions executed on Easdaq will be settled through the international
settlement agencies Euroclear and Cedelbank, by delivery to be made against
payment. Since April 19, 1999, Euroclear and Cedelbank are Easdaq's new
settlement agent.

Investors must hold a securities account with a financial institution which
directly or indirectly has access to Easdaq's settlement agent's clearing and
settlement system.

The clearing costs, if any, will be at the cost of the investors. Investors
are invited to inquire about such costs.

The following summarizes certain aspects of the operation of the respective
clearing systems Euroclear, Cedelbank and DTC.

EUROCLEAR AND CEDELBANK

Euroclear and Cedelbank each hold securities for their customers and
facilitate the clearance and settlement of securities transactions by electronic
book-entry transfer between their respective account holders. Euroclear and
Cedelbank participants are world-wide financial institutions, including
underwriters, securities brokers and dealers, banks, depositories, trust
companies and clearing corporations. Indirect access to Euroclear and Cedelbank
is available to other institutions that clear through or maintain a custodial
relationship with an account holder of either system.

DTC

DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provision of Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities of its participants and
to facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
the DTC book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.

TRANSFERS BETWEEN EUROCLEAR, CEDELBANK AND DTC PARTICIPANTS

Euroclear and Cedelbank have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other. Each of Euroclear and Cedelbank maintains a custodial relationship
with a DTC participant through which their respective participants settle trades
with a DTC participant.

Each share offered in this offering will be transferred in one of the
following manners:

- between Euroclear participants in accordance with the procedures
established for this purpose by Euroclear;

- between Cedelbank participants in accordance with the procedures
established for this purpose by Cedelbank;

A-5
<PAGE>
- between DTC participants in accordance with the procedures established for
this purpose by DTC;

- between Cedelbank participants and DTC participants by an increase or a
decrease of the amount of shares held in Cedelbank's account with its
custodian and a corresponding decrease or increase of the amount of shares
held by the other relevant DTC participant or participants; and

- between Euroclear participants and DTC participants by an increase or a
decrease of the amount of shares held in Euroclear's account with its
custodian and a corresponding decrease or increase of the amount of shares
held by the other relevant DTC participant or participants.

Euroclear and Cedelbank in no way undertake to and have no other
responsibility to monitor or ascertain whether any transaction in our shares or
any other of our securities complies with any selling, transfer or ownership
restrictions.

SECURITIES IDENTIFICATION NUMBERS

The international securities identification code (ISIN) of the shares is
and the common code for the shares is .

CERTAIN TAX CONSIDERATIONS FOR BELGIAN INVESTORS

The following summary is based on the Belgian tax laws as in effect on the
date of this prospectus and is subject to changes in Belgian law, including
changes that could have a retroactive effect. Prospective investors are urged to
consult their own tax advisers as to Belgian and other tax consequences in
connection with the purchase, ownership or disposal of our common stock. It does
not describe Belgian estate and gift tax considerations. Furthermore, this
summary does not address Belgian tax considerations relevant to potential
investors, subject to taxing jurisdictions other than, or in addition to,
Belgium, and does not address all possible categories of investors, some of whom
may be subject to special rules.

TAXATION OF DIVIDENDS

US-BELGIAN TAX TREATY. For Belgian resident stockholders, including
individuals, non-profit organizations and companies, the US withholding tax on
dividend payments on our common stock is in principle reduced to 15% pursuant to
Section 10 of the Belgian-US income tax treaty. If, however, the beneficial
owner is a Belgian company holding at least 10% of the voting rights, a reduced
rate of 5% is applicable.

For Belgian resident individuals holding shares of common stock as private
investment, rather than as a business asset, Belgian withholding tax at the rate
of (presently) 25% will be due on the net dividend (i.e. after deduction of US
withholding tax) in case the dividend is paid through a paying agent established
in Belgium. The dividends need not to be reported in the individual's annual
income tax return (the withholding tax constitutes the final Belgian income
tax), but it may be in the interest of the holder to report it if his taxable
income is lower than the taxable minimum. In case no paying agent established in
Belgium intervenes, no withholding tax is due in Belgium for Belgian resident
individuals, but the dividend is to be declared in the annual tax return and the
net dividend (i.e. after deduction of US withholding tax) will be taxed at a
rate of (presently) 25% plus local taxes.

The dividend withholding tax rate on shares which are publicly issued after
January 1, 1994 can be lowered to 15%. The benefit of the reduced withholding
tax rate may be refused on the basis of certain anti-abuse rules provided for by
Belgian tax legislation. These anti-abuse rules provide INTER ALIA that the
newly issued shares may not have any preferential divided rights and that any
capital reduction

A-6
<PAGE>
which does not correspond to genuine financial or economic needs will reduce the
benefit of the lower withholding tax.

For Belgian resident individuals whose shares of common stock are
effectively connected with their business in Belgium, the dividends are taxed at
the ordinary rates of business income (i.e. varying from 25% to 55% to be
increased by a crisis contribution of 3% of the tax due and by local taxes). The
Belgian withholding tax withheld by the Belgian paying agent (if any), can be
credited against the final income tax due, provided that the holder had the full
ownership of the shares of common stock at the time of the payment of the
dividends and provided that the dividend distribution does not entail a
reduction in value of, or capital loss on, the shares.

For Belgian resident entities subject to the legal entities tax (non-profit
organizations, pension funds, etc.), Belgian withholding tax at the rate of
(presently) 25% will be due on the net dividend (i.e. after deduction of US
withholding tax) in case the dividend is paid through a paying agent established
in Belgium. In case no such paying agent intervenes, they have the obligation to
pay the Belgian withholding tax themselves to the Belgian Treasury. This
withholding tax constitutes the final Belgian income tax.

For Belgian resident companies and for companies that have their tax
residence outside Belgium but hold shares of common stock through a permanent
establishment or a fixed base in Belgium, the net dividend (i.e., after
deduction of US withholding tax) will be taxed at the normal income tax rate in
Belgium for companies (presently 40.17%). The US withholding tax is not
creditable against the Belgian income tax.

However, provided that the dividends benefit from the so called
"dividend-received deduction", only 5% of the dividends received will be
taxable. In order to benefit from the deduction, the paying company must not
fall within one of the categories of which the dividends are expressly excluded
from the "dividend-received deduction" (e.g., companies which are not subject to
a corporate income tax or which are subject to a corporate income tax regime
which is much more advantageous than the Belgian tax regime), and the recipient
company should hold, at the time of the payment of the dividends, an equity
participation in the paying company of at least 5% or with an acquisition value
of approximately EUR 1.2 million.

The dividend-received deduction also applies, even if the quantitative
criteria are not fulfilled, if the recipient company is identified as a credit
institution mentioned in Article 56, Section 1 of the Belgian Income Tax Code
("BITC/92"), an insurance company mentioned in Article 56, Section2, 2 DEG., h
of the BITC/92, a broker company mentioned in Article 47 of the Law of 6 April
1995, or as an investment company as defined in Article 2, Section2, 6 DEG. of
the BITC/92.

CAPITAL GAINS TAXATION

Belgian resident individuals holding shares as a private investment and
Belgian resident entities subject to the legal entities tax are in principle not
liable for Belgian income tax on capital gains realized upon the sale, exchange
or other transfer of shares of common stock, unless the Belgian Tax
Administration demonstrates that the capital gain is the result of speculation.

Belgian resident individuals whose shares of common stock are effectively
connected with their business in Belgium, are taxable on capital gains realized
on the sale, exchange or other transfer of the shares at the ordinary
progressive income tax rates for business income.

Belgian resident companies are generally not liable for Belgian income tax
on capital gains realized upon the sale, exchange or other transfer of shares of
common stock, provided that the shares qualify for the dividend-received
deduction (except for the minimum holding requirement).

A-7
<PAGE>
Belgian non-residents who do not carry on a business in Belgium through a
Belgian establishment (or permanent establishment) to which the shares are
attributable are not subject to any Belgian capital gains taxation on the
disposal of the shares. Capital gains realized by Belgian non-resident companies
carrying on a business in Belgium through a Belgian establishment (or permanent
establishment) to which the shares are attributable are subject to the same tax
rules as those discussed in Belgian resident companies.

Capital losses realized upon the sale, exchange or other transfer of shares
of common stock are generally not tax deductible.

BELGIAN INDIRECT TAXES

TAX ON SECURITIES TRANSACTIONS

The subscription of newly issued shares of common stock through a
professional intermediary established in Belgium is in principle subject to the
tax on securities transactions at the rate of (presently) 0.35% (but limited to
BEF 10,000 per transaction).

The subsequent sale, exchange or other transfer of shares of common stock
through a professional intermediary established in Belgium is in principle
subject to this tax at the rate of (presently) 0.17% (but limited to BEF 10,000
per transaction).

The following persons and entities are exempt from the tax:

- professional intermediaries mentioned in Article 2 of the Law of 6 April
1995 acting for their own account;

- insurance companies mentioned in Article 2, Section1 of the Law of 9 July
1975 acting for their own account;

- pension funds mentioned in Article 2, Section3, 6 DEG. of the Law of 9
July 1975 acting for their own account;

- collective investment institutions mentioned in the Law of 4 December 1990
acting for their own account;

- non-residents (provided that they deliver to the issuer or the
professional intermediary, as the case may be, an affidavit confirming
their non-resident status in Belgium).

A-8
<PAGE>
INSIDE BACK COVER:

[PICTURES--THE INSIDE BACK COVER CONTAINS PICTURES AND TEXT REGARDING THE DMD
DIGITAL RADIOGRAPHY FIMLESS X-RAY. IN THE UPPER LEFT CORNER IS THE FRONT VIEW OF
3 DIGITAL X-RAY SENSORS. IN THE UPPER RIGHT CORNER IS A PICTURE OF A COMPUTER
KEYBOARD AND MONITOR WITH AN X-RAY OF A TOOTH ON THE SCREEN. IN THE MIDDLE ARE
BULLET POINTS DESCRIBING THE DIGITAL X-RAY SENSORS. AT THE BOTTOM ARE BULLET
POINTS DESCRIBING THE ADVANTAGES OF DMD'S DIGITAL X-RAY.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO GIVE YOU INFORMATION DIFFERENT THAN THAT CONTAINED IN THIS
PROSPECTUS. WE ARE OFFERING TO SELL SHARES OF COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS DATE, REGARDLESS OF THE TIME YOU RECEIVE
THIS PROSPECTUS.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 4
Risk Factors.................................... 7
Use of Proceeds................................. 12
Price Range of Common Stock and Warrants........ 13
Dividend Policy................................. 13
Capitalization.................................. 14
Dilution........................................ 14
Selected Consolidated Financial Data............ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business........................................ 23
Management...................................... 34
Certain Relationships and Related
Transactions.................................. 39
Principal Stockholders.......................... 40
Selling Stockholder............................. 42
Description of Capital Stock.................... 43
Shares Eligible For Future Sale................. 45
Underwriting.................................... 44
Legal Matters................................... 48
Experts......................................... 48
Additional Information.......................... 48
Index to Financial Statements................... F-1
Supplemental Easdaq Information................. A-1
</TABLE>

------------------------

UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS' TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,000,000 SHARES

[LOGO]

COMMON STOCK

---------------------

PROSPECTUS

---------------------

APRIL 23, 1999

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As permitted by the Delaware General Corporation Law ("DGCL"),
Dental/Medical's Amended and Restated Certificate of Incorporation limits the
personal liability of directors to Dental/Medical for monetary damages for
certain breaches of fiduciary duty. Liability is not eliminated for (i) any
breach of the director's duty of loyalty to Dental/Medical or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payment of dividends or stock
purchases or redemptions pursuant to Section 174 of the DGCL, or (iv) any
transaction from which the director derived an improper personal benefit.

We have also entered into indemnification agreements with each of our
directors and executive officers. The indemnification agreements provide that
the directors and executive officers will be indemnified to the fullest extent
permitted by applicable law against all expenses (including attorneys' fees),
judgments, fines and amounts reasonably paid or incurred by them for settlement
in any threatened, pending or completed action, suit or proceeding, including
any derivative action, on account of their services as a director or officer of
Dental/Medical or of any subsidiary of Dental/Medical or of any other company or
enterprise in which they are serving at the request of Dental/Medical. No
indemnification will be provided under the indemnification agreements, however,
to any director or executive officer in certain limited circumstances, including
on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.

Dental/Medical has purchased a directors and officers liability insurance
policy in the amount of $5,000,000.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table itemizes the expenses incurred by Dental/Medical
Diagnostic Systems, Inc. in connection with the issuance and distribution of the
Securities being registered, other than underwriting fees. All the amounts shown
are estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.

<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission.............. $ 5,000
Nasdaq National Market listing fee................................ 88,500
Accounting fees and expenses...................................... 100,000
Legal fees and expenses (other than blue sky)..................... 250,000
Printing.......................................................... 125,000
Transfer agent and registrar fees................................. 3,500
Miscellaneous..................................................... 48,000
---------
Total......................................................... $ 620,000
---------
---------
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

On May 30, 1996, we completed the sale of a total of 422,219 shares of
common stock to six foreign investors. Each share was sold at a price of $2.58
per share and, consequently, we raised approximately $1,055,000 from the sale,
net of related expenses of approximately $34,000.

II-1
<PAGE>
On November 27, 1996, we raised approximately $1,314,000, net of issuance
costs of $285,000, through a private placement of 32 Units to certain accredited
investors. Each Unit consisted of a secured promissory note in the principal
amount of $50,000 ("Bridge Note") and a warrant to purchase 18,750 shares of
Common Stock ("Bridge Warrant") at a purchase price of $2.67 per share. The
Notes bore interest at a rate of 10% per annum and the principal and all accrued
interest were payable upon the earliest to occur of: (a) May 27, 1998; (b)
certain change in control events effecting us; (c) a public offering of our
securities; or (d) the sale by our Chief Executive Officer of all or
substantially all of his holdings of our common stock. Upon the happening of
certain events the holders of the Notes had the right to convert outstanding
balances of their Notes into shares of our common stock at a rate of $2.67 per
share. The Bridge Warrants were first exercisable on November 27, 1997 and
expire on November 27, 2002. As a result of the warrants, notes were discounted
by $259,104, which amount was being amortized over the term of the notes. The
Bridge Warrants were converted into 1,600,000 Redeemable Common Stock Purchase
warrants upon closing of our Offering on May 14, 1997.

On September 17, 1997, we issued 50,000 shares of common stock to DMD NV,
our licensed exclusive distributor of the TeliCam System in Europe, in exchange
for termination of DMD NV's exclusive distribution rights in Europe. The market
value of the common stock issued was $256,250.

On March 2, 1998, we entered into an agreement with accredited investors and
institutional purchasers for the private placement (the "Debt Placement") of our
12% senior subordinated notes due 1999 (the "Senior Subordinated Notes"), and
450,000 warrants (the "1998 Warrants"). The Debt Placement was consummated on
March 19, 1998. The 1998 Warrants are (i) exercisable commencing on May 15,
1998, and for five years thereafter for the purchase of one share of common
stock per Warrant; and (ii) at an exercise price of $5.812 per share. The Senior
Subordinated Notes (i) bear interest payable semi-annually at a rate of 12% per
annum; (ii) mature on the first anniversary of the date of issuance; and (iii)
may be repaid by us prior to maturity at one hundred and two (102%) percent of
the amount of unpaid principal plus interest due as of the date of repayment. As
a result of the warrant issuance, the Senior Subordinated Notes were discounted
by $1,620,225, which is being amortized over the term of the Notes. On September
16, 1998, accrued interest of $270,000 was paid to the Note holders in
accordance with the Debt Placement agreement. On January 27, 1999, we repaid the
Senior Subordinated Notes, in full, plus $189,000 of accrued interest.

On October 2, 1998, we issued 100,000 shares of our common stock, valued at
$462,500, to Chrysalis Dental, Inc. ("CDI") as a portion of the purchase price
for an exclusive worldwide license to make or have made, use, or sell patent
pending tooth whitening products created by CDI. We relied on section 4(2) of
the Securities Act of 1933 as an exemption from registration of these shares.

On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany. We issued 100,000
shares of our common stock, valued at $762,500, as the consideration for the
purchase of the assets. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by DMD Germany and used in the conduct of the business of DMD
Germany.

On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom. We issued
50,000 shares of our common stock, valued at $381,250, as the consideration for
the purchase of the assets. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by Midas, Ltd. and used in the conduct of the business of Midas,
Ltd.

II-2
<PAGE>
ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>

1.1 Form of Underwriting Agreement.*

3.1 Amended and Restated Certificate of Incorporation of Registrant.(1)

3.2 Amended and Restated Bylaws of Registrant.

4.1 Specimen Stock Certificate of Common Stock of Registrant.(1)

5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.*

10.1 1997 Stock Incentive Plan.(2)

10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).(2)

10.3 Form of Registrant's Stock Option Agreement (Incentive Stock Option).(2)

10.4 Form of Director and Officer Indemnification Agreement.(3)

10.5 Agency Agreement dated as of October 23, 1996, by and between the Registrant and M.H. Meyerson & Co.,
Inc. (4)

10.6 Form of Registration Rights Agreement Letter, dated January 31, 1997, from Registrant to those certain
purchasers of the Registrant's Common Stock listed on the Schedule thereto.(2)

10.7 Commitment Letter, dated February 13, 1997, from Comerica Bank confirming the existence of a secured
line of credit for the Registrant.(2)

10.8 Employment Agreement, dated as of October 1, 1996, entered into by the Registrant and Robert H.
Gurevitch.(4)

10.9 Employment Agreement, dated as of October 1, 1996, entered into by the Registrant and Dewey Perrigo.(4)

10.10 Distribution Agreement, dated as of October 1, 1996, between the Registrant and Boston Marketing
Company, Ltd., as amended.(2)

10.11 Promissory Note, dated February 1, 1996, between the Registrant and Robert H. Gurevitch.(2)

10.12 Promissory Note, dated February 15, 1996, made by the Registrant in favor of Robert H. Gurevitch(2)

10.13 Extension of Promissory Note, dated November 5, 1996, between the Registrant and Robert H. Gurevitch.(4)

10.14 Form of Indemnification Agreement and Schedule of Indemnified Parties.(3)

10.15 Standard Office Lease, dated October 30, 1995, between John Hancock Mutual Life Insurance Company ("John
Hancock") and the Registrant, for Suite 202 at 200 North Westlake boulevard Office; and Guaranty of
Lease, dated November 6, 1995, made by Robert H. Gurevitch in favor of John Hancock.(2)

10.16 Agreement between the Registrant and DMD NV dated as of September 30, 1997.(6)

10.17 Agreement between the Registrant and Suni Imaging Microsystems, Inc. dated October 10, 1997.(7)
</TABLE>

II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.18 Extension of automatic termination provisions of agreement between the Registrant and Suni Imaging
Microsystems, Inc., dated November 11, 1997.(7)

10.19 Purchase Agreement by and among the Registrant and the purchasers named herein with respect to the sale
and purchase of an aggregate of $4,500,000 aggregate principal amount of the Registrant's 12% Senior
Subordinated Notes due 1999, and Warrants dated as of March 2, 1998.(7)

10.20 Form of 12% Senior Subordinated Note due 1997.(7)

10.21 Form of Common Stock Purchase Warrant.(7)

10.22 Revolving Credit Loan and Security Agreement between the Registrant and Comerica Bank-California, dated
as of December 10, 1997.(7)

10.23 Variable Rate-Single Payment Note of the Company in form of Comerica Bank-California, dated as of
December, 19, 1997.(7)

10.24 First Modification to Variable Rate-Single Payment Note, between the Company and Comerica
Bank-California, dated as of December 24, 1997.(7)

10.25 Exclusive License Agreement between the Company and Chrysalis Dental, Inc., dated October 2, 1998.(8)

10.26 Agreement for the Sale of the Seller's Business and Assets, by and among the Company, Fadi Nahab and
DMDS Ltd., dated March 1, 1999.(8)

10.27 Agreement for the Sale of the Seller's Business and Assets, by and among DMD Gmbh, Ralf Muller and DMDS
Ltd., dated March 1, 1999.(8)

10.28 Credit Agreement between the Registrant and Imperial Bank, dated as of January 4, 1999.(8)

10.29 Standard Office Lease between the Company and Frank F. Parker (with addendum), dated August 8, 1997, for
16722 Millikan Avenue, Irvine, CA.(8)

10.30 Second Addendum to Standard Office Lease between the Company and Frank F. Parker, dated July 29, 1998,
for 16722 Millikan Avenue, Irvine, CA.(8)

10.31 Suni-DMD Manufacturing, Assembly & Test Services Agreement, by and between the Company and Suni
Microsystems, Inc., dated as of march 17, 1999.(8)

10.32 Mandate Agreement by and between the Registrant, Bank Brussels Lambert and Robert H. Gurevitch.

23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in its opinion filed as Exhibit 5.1
hereto).

23.2 Consent of PricewaterhouseCoopers LLP.

24.1 Power of Attorney (included on signature page).

27.1 Financial Data Schedule.(8)
</TABLE>

- ------------------------

* To be filed by amendment.

(1) Incorporated by reference to exhibits to Pre-effective Amendment No. 1 to
the Registration Statement on Form SB-2 of the Registrant filed on April 7,
1997 (File No. 333-22507).

II-4
<PAGE>
(2) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form SB-2 filed on February 28, 1997 (File No. 333-22507).

(3) Incorporated by reference to exhibits to Pre-effective Amendment No. 2 to
the Registrant's Registration Statement on Form SB-2 filed on April 30 (File
No. 333-22507).

(4) Incorporated by reference to exhibits to the Registrant's Report on Form
10-QSB, dated November 30, 1996.

(5) Incorporated by reference from the Registrant's Report on Form 8-K, dated
March 1,1996.

(6) Incorporated by referenced from exhibits to the Registrant's Report on Form
10-QSB dated September 30, 1997.

(7) Incorporated by reference to exhibits to Registrant's Report on Form 10-KSB
for the fiscal year ended December 31, 1997.

(8) Incorporated by reference to exhibits to Registrant's Report on Form 10-KSB
for the fiscal year ended December 31, 1998.

ITEM 28. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on April 20, 1999.

DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

BY: /S/ ROBERT H. GUREVITCH
-----------------------------------------
Robert H. Gurevitch
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRESIDENT

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Robert H.
Gurevitch and Stephen Ross, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------

/s/ ROBERT H. GUREVITCH Chairman of the Board,
- ------------------------------ Chief Executive Officer April 20, 1999
Robert H. Gurevitch and President

/s/ STEPHEN ROSS Chief Financial Officer
- ------------------------------ (Principal Financial and April 20, 1999
Stephen Ross Accounting Officer)

/s/ JACK PRESTON Executive Vice President of
- ------------------------------ Product Development and April 20, 1999
Jack Preston Director

/s/ MARVIN KLEINBERG Director
- ------------------------------ April 20, 1999
Marvin Kleinberg

II-6

<PAGE>

DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

AMENDED AND RESTATED BY-LAWS

<PAGE>

ARTICLE I

STOCKHOLDERS

Section 1.1 ANNUAL MEETING. An annual meeting of stockholders for the
purpose of electing directors and of transacting such other business as may come
before it shall be held each year at such date, time and place, either within or
without the State of Delaware, as may be specified by the Board of Directors.

Section 1.2 SPECIAL MEETINGS. Special meetings of stockholders for any
purpose or purposes may be held at any time upon call of the Chairman of the
Board, if any, the President, the Secretary, or a majority of the Board of
Directors, at such time and place either within or without the State of Delaware
as may be stated in the call and notice. A special meeting of stockholders
shall be called by the President or the Secretary upon the written request,
stating time, place and the purpose or purposes of the meeting, of stockholders
who together own of record 25% or more of the outstanding stock of any class
entitled to vote at the meeting.

Section 1.3 NOTICE OF MEETINGS. Notice of stockholders meetings,
stating the place, date and hour thereof, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be given by the
Chairman of the Board, if any, the President, any Vice President, the Secretary
or an Assistant Secretary, to each stockholder of record entitled to vote
thereat at least ten days but not more than sixty days before the date of the
meeting, unless a different period is prescribed by law.

2
<PAGE>

Section 1.4 QUORUM. Except as otherwise provided by law or the
certificate of incorporation or these By-Laws, at any meeting of stockholders,
the holders of a majority of the outstanding shares of each class of stock
entitled to vote at the meeting shall be present or represented by proxy in
order to constitute a quorum for the transaction of any business. In the
absence of a quorum for the transaction of any business. In the absence of a
quorum, a majority in interest of the stockholders present or the chairman of
the meeting may adjourn the meeting from time to time in the manner provided in
Section 1.5 of these By-Laws until a quorum shall attend.

Section 1.5 ADJOURNMENT. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

Section 1.6 ORGANIZATION. The Chairman of the Board, if any, or in his
absence the President, or in their absence any Vice President, shall call to
order meeting of stockholders and shall act as chairman of such meetings. The
Board of Directors or, if the Board fails to act, the stockholders may appoint
any stockholder or any director or officer of the Corporation to act as chairman
of any meeting in the absence of the Chairman of the Board, the President and a
Vice President.

The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.

3
<PAGE>

Section 1.7 VOTING. Except as otherwise provided by law, the
certificate of incorporation of these By-Laws and except for the election of
directors, at any meeting duly called and held at which a quorum is present, a
majority of the votes cast at such meeting upon a given question by the holders
of outstanding shares of stock of all classes of stock of the Corporation
entitled to vote thereon who are present in person or by proxy shall decide such
question. At any election of directors at which a quorum is present, the
directors shall be elected by a plurality of the votes cast at such election.

ARTICLE II

BOARD OF DIRECTORS

Section 2.1 NUMBER AND TERM OF OFFICE. The business, property and
affairs of the Corporation shall be managed and controlled by a Board of four
directors; provided, however, that the Board, by resolution adopted by vote of a
majority of the then authorized number of directors, may increase or decrease
the number of directors. The directors shall be elected at the annual meeting
of stockholders, and serve (subject to the provisions of Article IV) until the
next succeeding annual meeting of stockholders and until the election and
qualification of their respective successors.

Section 2.2 CHAIRMAN OF THE BOARD. The directors may elect one of their
members to be Chairman of the Board of Directors. The Chairman shall be subject
to the control of and may be removed by the Board of Directors. He shall
perform such duties as may from time to time be assigned to him by the Board.

Section 2.3 MEETINGS. The annual meeting of the Board of Directors, for
the election of officers and the transaction of such other business as may come
before the meeting, shall be held without notice at the same place as, and
immediately following, the annual meeting of the stockholders.

4
<PAGE>

Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.

Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, if any, the President or by one of the directors then in
office.

Section 2.4 NOTICE OF SPECIAL MEETINGS. The Secretary, or in his
absence any other officer of the Corporation, shall give each director notice of
the time and place of holding of special meetings of the Board of Directors by
mail at least three days before the meeting, or by telegram, cable or radiogram
or personal service at least one day before the meeting. Unless otherwise
stated in the notice thereof, any and all business may be transacted at any
meeting without specification of such business in the notice.

Section 2.5 QUORUM AND ORGANIZATION OF MEETINGS. A majority of the
total number of members of the Board of Directors as constituted from time to
time shall constitute a quorum for the transaction of business, but if at any
meeting of the Board of Directors there shall be less than a quorum present, a
majority of those present may adjourn the meeting from time to time, and the
meeting may be held as adjourned without further notice or waiver. Except as
otherwise provided by law of by these By-Laws, a majority of the directors
present at any meeting at which a quorum is present may decide any question
brought before such meeting. Meetings shall be presided over by the Chairman of
the Board, if any, or in his absence by the President, or in the absence of both
by such other persons as may be selected by the directors. The Secretary of the
Corporation shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.

5
<PAGE>

Section 2.6 COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of any
such absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it, but no such committee shall have
the power or authority in reference to amending the certificate of incorporation
of the Corporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of dissolution, or
amending these By-Laws; and, unless the resolution expressly so provided, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Each committee which may be established by the
Board of Directors or these By-Laws may fix its own rules and procedures.
Notice of meetings of committees, other than of regular meetings provided for by
the rules, shall be given to committee members. All action taken by committees
shall be recorded in minutes of the meetings.

Section 2.7 ACTION WITHOUT MEETING. Nothing contained in these By-Laws
shall be deemed to restrict the power of the directors or members of any
committee to take any action,

6
<PAGE>

required or permitted to be taken by them, without a meeting, in accordance with
applicable provisions of law.

Section 2.8 TELEPHONE MEETINGS. Members of the Board of Directors, or
any committee designated by the Board, may participate in a meeting of the
Board, or committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section shall
constitute presence in person at such meeting.

ARTICLE III

OFFICERS

Section 3.1 EXECUTIVE OFFICERS. The executive officers of the
Corporation shall be a President, a Treasurer and a Secretary, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect or
appoint such other officers (including one or more Vice Presidents, a Controller
and one or more Assistant Treasurers and Assistant Secretaries) as it may deem
necessary or desirable, each of whom shall have such authority, shall perform
such duties and shall hold office for such term as may be prescribed by the
Board of Directors from time to time. Any person may hold at one time two or
more offices.

Section 3.2 POWERS AND DUTIES. The Chairman of the Board, if any, or,
in his absence, the President, shall preside at all meetings of the stockholders
and of the Board of Directors. The President shall be the chief executive
officer of the Corporation. In the absence of the President, a Vice President
appointed by the President or the Board shall perform all the duties of the
President. The officers and agents of the Corporation shall each have such
powers and perform such duties in the management of the business affairs of the
Corporation as generally pertain to their respective offices, as well as such
powers and duties as from time to time may be prescribed by the Board of
Directors.

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<PAGE>

ARTICLE IV

RESIGNATIONS, REMOVALS AND VACANCIES

Section 4.1 RESIGNATIONS. Any director or officer of the Corporation,
or any member of any committee, may resign at any time by giving written notice
to the Board of Directors, the President or the Secretary of the Corporation.
Any such resignation shall take effect at the time specified therein or, if the
time be not specified therein, then upon receipt thereof. The acceptance of
such resignation shall not be necessary to make it effective.

Section 4.2 REMOVALS. The Board of Directors, at any meeting thereof,
or by written consent, may, to the extent permitted by law, at any time, remove
with or without cause from office or terminate the employment of any officer or
member of any committee.

Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors.

Section 4.3 VACANCIES. Any vacancy in the office of any director or
officer through death, resignation, removal, disqualification or other cause,
and any additional directorship resulting from increase in the number of
directors, may be filled at any time by a majority of the directors then in
office (even though less than a quorum remains) or by the stockholders, and,
subject to the provisions of this Article, the person so chosen shall hold
office until his successor shall have been chosen and shall have qualified; or
if the person so chosen is a director elected to fill a vacancy, he shall hold
office for the unexpired term of his predecessor.

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<PAGE>

ARTICLE V

CAPITAL STOCK

Section 5.1 STOCK CERTIFICATES. The certificates for shares of the
capital stock of the Corporation shall be in such form as shall be prescribed by
law and approved, from time to time, by the Board of Directors.

Section 5.2 TRANSFER OF SHARES. Shares of the Capital stock of the
Corporation may be transferred on the books of the Corporation only by the
holder of such shares or by his duly authorized attorney, upon the surrender to
the Corporation or its transfer agent of the certificate for such shares
properly endorsed.

Section 5.3 FIXING RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action.

Section 5.4 REGULATIONS. The Board of Directors shall have the power
and authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, registration, cancellation and replacement of
certificates for shares of stock of the Corporation.

ARTICLE VI

MISCELLANEOUS

Section 6.1 CORPORATE SEAL. The corporate seal shall have inscribed
thereto the name of the Corporation, the year of its organization and the words
"Corporate Seal" and "Delaware".

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<PAGE>

Section 6.2 FISCAL YEAR. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.

Section 6.3 NOTICES AND WAIVERS THEREOF. Whenever any notice whatever
is required by these By-Laws or by the certificate of incorporation, or by any
law to be given to any stockholder, director, or officer, such notice, except as
otherwise provided by law, may be given personally or by mail, or, in the case
of directors or officers, by telegram, cable or radiogram, addressed to such
address as appears on the books of the Corporation. Any notice given by
telegram, cable or radiogram shall be deemed to have been given when it shall
have been delivered for transmission and any notice given by mail shall be
deemed to have been given when it shall have been deposited in the United States
mail with postage thereon prepaid.

Whenever a notice is required to be given by any statute, the certificate
of incorporation, or these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the meeting
or at the time stated therein, shall be deemed equivalent in all respects to
such notice.

Section 6.4 STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS. Unless
otherwise directed by the Board of Directors, the President, the Secretary and
such attorneys or agents of the Corporation as may be from time to time
authorized by the Board of Directors or the President, shall have full power and
authority on behalf of this Corporation to attend and to act and vote in person
or by proxy at any meeting of the holders of securities of any corporation or
other entity in which the Corporation may own or hold shares or other
securities, and at such meetings shall possess and may exercise all the rights
and powers incident to the ownership of such shares or other securities which
this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President or Secretary, or such attorneys or agents,
may also execute and

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<PAGE>

deliver on behalf of the Corporation powers of attorney, proxies, consents,
waivers, and other instruments relating to the shares or securities owned or
held by this Corporation.

ARTICLE VII

AMENDMENTS

The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, alter, amend or repeal the By-Laws of the
Corporation by vote of not less than a majority of such shares, and the Board of
Directors shall have power equal in all respects to that of the stockholders to
adopt, alter, amend or repeal the By-Laws by vote of not less than a majority of
the entire Board. However, any By-Law adopted by the Board may be amended or
repealed by vote of the holders of a majority of the shares entitled at the time
to vote for the election of directors.

<PAGE>

- -------------------------------------------------------------------------------
MANDATE AGREEMENT :
- DUAL LISTING
- CAPITAL INCREASE
- -------------------------------------------------------------------------------

THIS AGREEMENT IS MADE BETWEEN,

1. Bank Brussel Lambert N.V., established under Belgian law, with its
registered office at 1000 Brussels, Marnixlaan 24, hereinafter referred to
as 'BBL', validly represented by :

...........

2. Dental / Medical Diagnostic Systems, Inc., a Delaware corporation, with its
principal office 200 N. Westlake Blvd, Suite 202, Westlake Village,
California 91362, hereinafter referred to as 'the Company', validly
represented by Mr Robert Gurevitch, Chairman and President;

............

3. Existing shareholders Mr Robert Gurevitch, residing at .........
hereinafter referred to as the 'Selling Shareholder',

WHEREAS

(A) The Company, of which the Common Stock and Common Stock Purchase Warrants
are listed on the NASDAQ Small Cap Market under the symbol "DMDS" and
"DMDSW" respectively, wishes to increase its capital through issuance of
2,000,000 shares of Common Stock (the "Shares") to finance the investments
envisaged and to apply for admission to trading of all the shares of Common
Stock of the Company on EASDAQ;

(B) In order to create more liquidity in respect of the Company's shares and in
order to fund future strategic alliances and acquisitions, the parties
hereto have the intention to initiate a combined public offering of the
Shares, the exact number of which shall be determined by mutual agreement
between the Company, the Selling Shareholder and BBL, and the subsequent
admission to trading of those Shares on EASDAQ (the "Transaction");

<PAGE>

NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS,

ARTICLE 1 - SUBJECT

The Company desires to issue 2,000,000 Shares, $ .01 par value, (the "Offered
Shares") of the Company.

The Company and the Selling Shareholder hereby agree to appoint BBL as Lead
Manager in connection with the Transaction.

The number of Offered Shares to be issued by the Company and to be sold by each
Selling Shareholder shall be determined by mutual agreement between the Company,
the Selling Shareholder and BBL.

ARTICLE 2 - DESCRIPTION OF THE TASKS OF BBL

2.1. IN GENERAL

BBL will act as Lead Manager of the Transaction. It will compose an
international underwriting and selling consortium (the institutions which will
constitute such consortium are hereafter referred to as the "Managers").

BBL may delegate with the Company's approval certain tasks to affiliated
companies (such as ING-Barings and Vermeulen-Raemdonck).

2.2. STRUCTURING OF THE TRANSACTION

BBL solely will act as Lead Manager. The tasks of the Lead Manager shall include
the following, without limitation :

- - analyse the business plan, the financial figures and the backlog orders of
the Company;
- - provide for equity research and research reports;
- - advise the Company of the technical modalities of the Transaction;
- - advise the Company as to geographical markets to envisage;
- - advise the Company with regard to the timing of the Transaction;
- - assist and coordinate in collaboration with BBL counsel the supplementation
and translation of the prospectus, to the extent required by Belgian law,
on the basis of information to be supplied by the Company;
- - assist in the drawing up of prospectus, summaries (and translations
thereof);
- - assist in the negotiations with all supervisory authorities and assist the
Company and the Selling Shareholder in obtaining the requisite approvals
for the Transaction, including, but not limited to, the filing to be
prepared in accordance with applicable laws and regulations, in
consultation with the Company's legal advisors;
- - assist the Company in respect of communications with the press and the
preparation of the road-shows and to the coordination of the marketing of
the Transaction;
- - advise the Company as to which external advisers to use, e.g. in connection
with the financial public relations and with regard to legal counsel;
- - assist the Company, together with the external legal counsel, in respect of
the legal aspects of the Transaction,

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<PAGE>

- - assist with the printing and distribution of the prospectus;
- - determine, in agreement with the Company, the period during which the
Offered Shares will be offered (the 'Offering Period');
- - act as bookrunner with regard to the Combined Offering and allocate the
Offered Shares;
- - determine, by mutual agreement with the Company, the possible discount, if
any, at which the Offered Shares are to be offered, as well as the fixed
price at which they are finally to be sold;
- - coordinate the activities of the members of the consortium;
- - structure the Transaction in consultation with the legal advisors of the
Company;
- - advise the Company and the Selling Shareholder in respect of the size of
the Transaction, the number of Shares to be offered and the pricing and
placement method for the Offered Shares;
- - consult with the Company and the Selling Shareholder regarding any
reduction of demand and allocation of Offered Shares, in accordance with
the recommendations of the Belgian Commission for Banking and Finance;
- - centralize the orders and payments of the other members of the consortium
and other financial institutions;
- - organize internal marketing actions within the BBL network.

2.3. WITH REGARD TO THE TRANSACTION

- - centralise the payments;
- - perform the services of a financial intermediary;
- - perform the financial service in connection with the Shares.

2.4. MARKET MAKING

BBL/Vermeulen Raemdonck will act as market maker in connection with the Shares
listed on EASDAQ in accordance with the provisions of the EASDAQ Rule Book.

In connection with such market making, BBL/Vermeulen Raemdonck shall (during a
period of two years after the admission to trading of the Offered Shares) inform
the shareholders in an active manner and provide sufficient financial
information regarding the Company by, inter alia, publishing additional
follow-up equity research reports, without any additional fees being due for the
performance of such services.

ARTICLE 3 - CONDITIONS

The obligations of BBL to affect the Transaction under this agreement (the
'Agreement') is subject to the following conditions :

a) There will not occur any political, military, financial, economical,
monetary or social events nor any change in the taxation or exchange rates
or controls in Belgium nor in other countries which, in the reasonable
opinion of BBL, is expected to have a material adverse effect on the
Transaction;

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<PAGE>

b) The average of the EASDAQ index does not fall below a level which is 10 %
below the highest level reached by this average as from the signing of this
Agreement, to the extent, however, that in the opinion of BBL this would be
likely to prejudice the success of the Transaction or dealings in the
Shares in the secondary market;

c) The Company and the Selling Shareholder will not fail to use their
commercially reasonable efforts to cooperate with respect to timely
furnishing of information nor to observe any legal and administrative
requirements with respect to the Transaction;

d) The Company shall have filed a registration statement for the Offered
Shares with the US Securities and Exchange Commission (the "SEC") and such
registration statement shall have been declared effective by the SEC;

e) The due diligence conducted by TROOP, STEUBER, PASICH, REDDICK &TOBEY LLP
("TSPR&T") will not reveal any element which, in the reasonable opinion of
BBL, would have a material adverse effect on the Transaction;

f) Trading generally on EASDAQ shall not have been suspended for two
consecutive days, nor shall maximum ranges for prices for securities have
been set, or minimum or maximum prices for trading have been fixed by said
exchange;

g) The prospectus shall have been approved by the Commission for Banking and
Finance and the EASDAQ Market Authority shall have admitted the Shares to
trading on EASDAQ.

h) The Company, the Selling Shareholder and the Managers shall have agreed on
and entered into an underwriting agreement under the conditions set out in
Article 5 of this Agreement and in form and substance customary for
international public offerings.

If any of the conditions hereinabove provided for shall occur or, as the
case may be, shall not have been fulfilled when and as required by the
respective provisions, the obligations of BBL under this Agreement may be
terminated by either BBL or the Company by notifying the other party and
the Selling Shareholder of such termination in writing, by letter of by fax
at or prior to the last day of the Offer Period (the 'Closing Date'). In
such event, the Selling Shareholder, the Company and the Managers shall not
have any further obligation under this Agreement (except to the extent
provided in Sections 7 and 8 hereof).

ARTICLE 4 - GENERAL STRUCTURE OF THE OFFER

4.1. COMBINED OFFERING

The Combined Offering will consist of a public offering in Belgium and a private
offering in and outside Belgium (excluding the United States, Japan and Canada),
which will take place simultaneously. The allocation of Offered Shares will be
determined by BBL in concertation with the Company according to set criteria to
be agreed upon.

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<PAGE>

4.2. GREEN SHOE

The Company and/or the Selling Shareholder, as the case may be, shall grant BBL
an option to purchase up to 200,000 shares of common stock (the "Greenshoe
Shares") to cover any over-allotments, exercisable within 30 days from the first
date of trading on EASDAQ. The proportional share of the Company and the Selling
Shareholder in the Greenshoe Shares (if the option is exercised) shall be
determined amongst them, at their discretion. In the event that the Company,
upon exercise of the option, delivers all the Greenshoe Shares, the Selling
Shareholder shall no longer be a party to this Agreement and all references in
this Agreement to the "Selling Shareholder" shall be deleted.

ARTICLE 5 - UNDERWRITING

An underwriting agreement will be entered into between the Managers, the Company
and the Selling Shareholder on the date of closing of the Offering Period, which
will be governed by Belgian law and will be subject to the following conditions:

a) There will not occur any political, military, financial, economical,
monetary or social event in Belgium nor in other countries which, in the
reasonable opinion of BBL, is expected to have a material adverse effect on
the Transaction;

b) The underwriting agreement shall contain (i) representations and warranties
of the Company and the Selling Shareholder effective as of the date of the
underwriting agreement substantially in the form as set out in Annex I,
(ii) undertakings and obligations of the Company and Selling Shareholder
substantially in the form as set out in Annex II and (iii) the
indemnification provisions substantially in the form as set out in Annex
III.

c) BBL, as representative of the Managers, shall have received on the Closing
Date the opinion for the Company and the Selling Shareholder, dated as of
the Closing Date, substantially covering the matters listed in Annex IV
hereto;

d) At the time of execution of the underwriting agreement, BBL, as
representative of the Managers, shall have received from _____________,
auditors to the Company, a letter dated such date , in form and substance
satisfactory to the Managers, containing statements and information of the
type ordinarily included in accountants' "comfort letters" to managers with
respect to the financial statements and certain financial information
contained in the Registration Statement and Prospectus. At the time of
Closing __________, auditors shall furnish a letter, dated not more than
three business days prior to Closing, reaffirming the statements of the
letter mentioned above in this paragraph;

e) The notification in respect of article 26 of the Royal Decree nDEG. 185 of
July 9, 1935 and all amendments thereto shall have become effective and any
request of the Banking and Finance Commission for additional information
(to be included in the notification, the Prospectus or otherwise) shall
have been disclosed to the Managers and complied with to its and their
satisfaction. No stop order suspending the effectiveness of the
notification or the Prospectus shall have been issued and no proceedings
for that purpose shall have been taken or threatened by the Banking and
Finance Commission or, to the knowledge of the Company, shall be
contemplated by the Banking and Finance Commission and no injunction,
restraining order, or order of any nature by a

5
<PAGE>

court shall have been issued nor shall proceedings in respect thereof be
pending or threatened as of the Closing Date which would prevent the sale
or the issuance of the Offered Shares;

e) The Shares shall be admitted to trading on EASDAQ, subject only to BBL
being satisfied that they will be listed or admitted to trading not later
than three days after the Closing Date;

f) The registration statement pertaining to the Transaction shall have been
declared effective by the U.S. Securities and Exchange Commission.

ARTICLE 6 - FEES

The Company and the Selling Shareholder agree to pay severally and not jointly,
pro-rata based on their respective portions of the proceeds from the
Transaction, to BBL the following fees, to be increased with VAT (if
applicable):

6.1 MANAGEMENT FEE

For the services rendered as Lead Manager in preparation of and during the
Transaction, BBL will receive a fee of 1,4 % of the Price per share multiplied
by the amount of Offered Shares (excluding Greenshoe Shares).

This remuneration will also be due if the Transaction is cancelled as a result
of a disposal in any way of a division or part of the Company before the
termination date of this Agreement referred to in article 12 and will be
calculated on the countervalue or economical value of the transaction which the
Company and/or the case may be the Selling Shareholder receive or benefit.

6.2. UNDERWRITING FEE

For the underwriting commitment, BBL as representative of the Managers, will
receive a fee of 1,4 % of the Price per share multiplied by the amount of
Offered Shares (excluding Greenshoe Shares).

6.3. Selling fee

For the selling services BBL, as representative of the Managers, will receive a
fee of 4,2 % of the Price per share multiplied by the aggregate amount of the
Offered Shares and the shares of the Greenshoe.

6.4. DIVISION OF FEES

The fees may be divided between the Managers in such proportions as BBL may
determine. The Company shall not be concerned with and have no liability with
regard to the arrangements between BBL and the Managers.

ARTICLE 7 - TAXES, COSTS AND EXPENSES

Except as otherwise provided the Company will pay the out-of-pocket costs and
expenses and fees in relation to this Agreement, which are substantially the
following (the "Out-of-Pocket Expenses") : accounting fees, the fees and
disbursements of any counsel for the Company (such as without limitation legal,

6
<PAGE>

fiscal, public relations), patent attorney, notary public, advertising,
logistics, the cost of printing and delivering to, or as requested by, the
Managers of copies of the Prospectus and any previous drafts thereof and final
versions thereof, the translation costs for the Prospectus summary and final
versions thereof, the filing fees of the Banking and Finance Commission; the
filing fees and expenses incident to the EASDAQ trading, the costs for the
issuance of the global certificate(s), the fees for the deposit of these with
Euroclear and the expenses in connection with the roadshows.

To the extent, if at all, that the Selling Shareholder or any of the Managers
engage special legal counsel to represent them in connection with this Combined
Offering, the fees and expenses of such counsel shall be borne by the Selling
Shareholder or such Manager.

Any taxes, stamp duties or registration fees imposed on the initial sale or the
issue of the Offered Shares to the several Managers will be paid by the Company
and the Selling Shareholder.

If the Transaction is not consummated because the Company or BBL decides not to
proceed with the offering for any reason as permitted under this Agreement
(including under articles 3 and 13) other than a material breach by BBL of its
obligations (in which case no amount shall be due to BBL), or because BBL
decides not to proceed with the Transaction as a result of a material breach by
the Company of its representations, warranties or covenants in this Agreement or
as a result of any failure, refusal or inability on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on their part to be performed, then, as the BBL's
sole and exclusive remedy, the Company will be obligated to reimburse BBL for
its accountable Out-of-Pocket Expenses up to the sum of $ 100,000 (US). In no
event, will BBL, in the event this Agreement is terminated, be entitled to
receive more than an amount equal to its actual accountable Out-of-Pocket
Expenses.

ARTICLE 8 - PAYMENTS

8.1. The payment of the management fee, the underwriting and selling fee
referred to in 6.2., 6.3. and 6.4. will be due on a day to be
determined in the Underwriting agreement to be entered into.

8.2. The payment of the remuneration referred to in the second paragraph of
6.1. will be due at the closing of the Transaction described therein.

ARTICLE 9 - NOTICES

All communications hereunder shall be in writing and may be mailed, delivered,
telecopied or telegraphed as follows :

To BBL To The company and the Selling
Att. Jos Behiels Shareholder
Att. Dental / Medical Diagnostic
Systems Inc.

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<PAGE>
ARTICLE 10 - WAIVER

BBL may in its discretion and on such terms as it thinks fit, waive or extend
time for compliance with all or any part of the conditions set out or referred
to in this Agreement.

ARTICLE 11 - RESPONSIBILITY

BBL shall execute the tasks hereunder with the skill and care appropriate to a
prudent professional with respect to the Transaction.

The contractual obligations provided for in this Agreement, save for the
underwriting obligations referred to in Article 5, are to be fulfilled on a best
effort basis without guaranteeing any result
BBL will only bear responsibility for the direct damages as a result of gross
negligence, wilful misconduct or fraud. BBL will bear no responsibility
whatsoever for any faults, errors or failure to perform by third parties who
participated in preparation of the Transaction, except if such third parties are
engaged by BBL without the agreement of the Company and the Selling Shareholder.

ARTICLE 12 - TERMINATION

This Agreement is entered into for a definite period of time and will
automatically expire at the earlier of December 1999 or the date on which all
the Offered Shares and Greenshoe Shares, as the case may, are paid for by the
Managers.

Notwithstanding the foregoing paragraph, termination of this Agreement will not
affect accrued rights, existing commitments and any contractual provisions
intended to survive termination, including articles 6, 7, 11, 12 and 15 of this
Agreement.

ARTICLE 13 - REVOCATION

The Company may terminate this Agreement at any time with immediate effect and
without the need for judicial authorization, but without prejudice to its
obligation to pay the Out-of-Pocket Expenses as set out in the last paragraph of
article 7, in the event the price at which the Offered Shares will be
effectively offered falls below USD 7.00 as quoted on the NASDAQ Small Cap
Market. In no event will BBL, in the event this Agreement is terminated in
accordance with this Article, be entitled to receive more than an amount equal
to its actual accountable Out-of-Pocket Expenses.

ARTICLE 14 - SUCCESSORS

This Agreement has been and is made solely for the benefit of BBL, the Company
and the Selling Shareholder and their respective successors, executors,
administrators, heirs and assigns, and the officers and directors and persons
referred to herein, and no other person will have any right or obligation
hereunder. No purchaser of any of the Offered Shares from any Managers shall be
deemed a successor or assign merely because of such purchase.

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<PAGE>

ARTICLE 15 - CONFIDENTIALITY AND CONFLICTS

15.1 It is understood that no press releases or other publicity relating to
the Transaction will be issued without the prior written agreement of
the Company, the Selling Shareholder and BBL, and that no material
relating to the Transaction will be distributed without the prior
written agreement of the Company, the Selling Shareholder and BBL,
except as may be required by law, the rules of respectively the Nasdaq
Small Cap Market and Easdaq or as ordered by a competent authority or
court of law. Except for disclosures permitted by the previous
sentence, the Company, the Selling Shareholder and BBL agree to keep
the Transaction strictly confidential and not to make any announcement
of the Transaction until the launch of the pre-marketing campaign with
targeted institutional investors.

15.2 BBL recognizes that information received by it during the course of
its engagement is of a confidential nature and unless otherwise agreed
by the Company and the Selling Shareholder neither BBL nor the
Managers shall use such confidential information for any purpose other
than the Transaction or disclose any such information to any third
party, provided always that the Managers may be bound by law to
disclose such confidential information to the competent Market
Authorities or regulatory agencies.

The Managers shall be allowed to disclose such confidential
information if needed for the purpose of defending any claim or action
against it in respect to the Transaction. The Managers will promptly
notify in advance the Company and the Selling Shareholder of any such
disclosure of information or production of documents. The Managers
will, where reasonably practicable, seek to impose a confidentiality
requirement on the recipient in any case where the information is not
subject to statutory restrictions on disclosure.

ARTICLE 16 - SUBMISSION TO JURISDICTION

This Agreement and any discussions in relation hereto shall be governed and
resolved in accordance with Belgian law. The competent Courts of Brussels will
have the exclusive jurisdiction and every party hereto hereby accepts the
competence of said courts.

ARTICLE 17 - SEVERABILITY

The invalidity or unenforceability of any one stipulation or clause of the
present Agreement shall not result in the invalidity or the unenforceability of
any other provision of the Agreement or of the Agreement as a whole. In the
event that the validity or the enforceability of this Agreement or any provision
thereof is challenged the parties hereto undertake to do whatever is reasonably
necessary or advisable to maintain such provision and this Agreement in full
force and effect or to substitute such provisions by other provisions that have
economically substantially the same effect for all parties hereto.

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<PAGE>

Brussels, April 15, 1999 made in 3 originals each party hereto declaring to have
received one original.

The Company The Selling Shareholder

/s/ /s/

Bank Brussels Lambert

/s/
10
<PAGE>

ANNEX I

REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDER

For the purpose of these representations and warranties, "Material Adverse
Effect" means a material adverse change occurred with respect to the business
operations, assets, properties, financial condition or results of operations of
the Company and its subsidiaries taken as a whole.

BY THE COMPANY :

(a) The Company has prepared in consultation with BBL the filing with the
competent authorities of (i) a request for admission to trading of all
Shares on EASDAQ, (ii) a notification pursuant to article 26 of the Royal
Decree nDEG. 185 of July 9, 1935 and (iii) a prospectus relating to the
public offering in Belgium of the Offered Shares.

(b) The Prospectus, as of the Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact as required
to be stated therein or necessary to make the statements therein not
misleading, provided that this representation and warranty does not cover
any information furnished by BBL;

(c) The Company has been duly organized and is validly existing as a
corporation in good standing (good standing meaning for the purposes of
this Agreement that the Company has filed all documents required to
maintain its corporate existence) under the corporate laws of Delaware,
with corporate power and authority to own or lease its properties and
conduct its business as carried on by it and as described in the
Prospectus. The Company is duly qualified to transact business as a
foreign corporation in good standing in all jurisdictions in which the
conduct of its business as currently conducted requires such qualification
(except for any jurisdictions where the failure to be so qualified or in
good standing would not have a material adverse effect on the shareholders'
equity, the condition (financial or otherwise), the business, management,
properties, assets, rights or operations of the Company and its
subsidiaries, taken as one enterprise);

(d) The Company had, at the respective dates indicated in the Prospectus, the
duly authorized and outstanding Shares set forth therein; the terms of the
Shares do, and at the Closing Date the terms of the Shares will, conform in
all material respects to the description thereof contained in the
Prospectus, and, except as disclosed in the Prospectus, there are no
outstanding securities convertible into or exchangeable for, or warrants,
rights or options to purchase from the Company, or obligations of the
Company to issue Shares;

(e) All of the outstanding Shares of the Company have been duly authorized and
validly issued, are fully paid and non-assessable ('non-assessable' shall
mean for the purposes of this Agreement that a shareholder is not required
to pay more to the Company than his original investment); on the Closing
Date, the Company's Shares will have been duly authorized and validly
issued, fully paid and non assessable and there are no pre-emptive or other
rights to subscribe to the Shares in favor of the shareholders;

(f) All of the outstanding Shares of each subsidiary of the Company have been
duly and validly authorized and issued and are fully paid and non
assessable;

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(g) The Company owns directly or indirectly that percentage of the issued and
outstanding shares of its subsidiaries set forth in the Prospectus as being
owned by the Company free and clear of any security interest, pledge, lien
or encumbrance;

(h) Each subsidiary of the Company is a company duly incorporated and validly
existing under the laws of the jurisdiction of its incorporation, is not in
liquidation or receivership and has the requisite corporate power and
authority to own its properties and conduct its business as described in
the Prospectus; each subsidiary of the Company is duly qualified to do
business as a foreign corporation in good standing in those jurisdictions
where the conduct of its business as currently conducted requires such
qualification (except in such jurisdictions where the failure to be so
qualified or in good standing would not have a material adverse effect on
the shareholders' equity, the condition (financial or otherwise), the
business, management, properties, assets, rights or operations of the
Company and its subsidiaries, taken as one enterprise);

(i) This Agreement and the performance by the Company of its obligations
thereunder, have been duly and validly authorized. This Agreement has been
duly and validly executed and delivered by the Company, and constitutes the
valid and legally binding agreement of the Company, enforceable against the
Company in accordance with its terms, provided, however, that the
enforceability of the Company's obligations may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditor's rights generally and by general
equitable principles;

(j) The Company is not in violation of or in default under its Certificate of
Incorporation and by-laws (the 'Corporate Documents') or, except as
disclosed in the Prospectus, under any material agreement, lease, license,
permits contract, indenture or other instrument or obligation to which it
is a party or by which it, or any of its properties, is bound other than
defaults which, individually or in the aggregate, would not have any impact
whatsoever on the validity of the issuance by it of the Offered Shares or
would not have a material adverse effect on the shareholders' equity, the
condition (financial or otherwise), the business, management, properties,
assets, rights or operations of the Company and its subsidiaries, taken as
one enterprise; The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfilment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of , or constitute a default under, any law or
applicable regulation, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company is a party, or of the
Corporate Documents or any order, rule or regulation applicable to the
Company of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction over the Company other than
defaults which individually or in the aggregate, would not have any
material adverse effect on the shareholders' equity, the condition
(financial or otherwise), the business, management, properties, assets,
rights or operations of the Company and its subsidiaries, taken as one
enterprise);

(k) The Company holds all material licenses, certificates and permits from
governmental authorities, required to use all trademarks, trade secrets or
other intellectual property rights which are necessary to the conduct of
its business as it is presently being conducted; and the Company has to the
best of its knowledge not violated or infringed, or, except as set forth in
the Prospectus, received any notice of violation or infringement or
conflict with asserted rights of others with

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<PAGE>

respect to any patents, patent rights, trade names, trademarks or
copyrights, which, if proven, would have a Material Adverse Effect;

(l) The Company knows of no material infringement by others of patents, patent
rights, trade names, trademarks or copyrights owned by or licensed to the
Company except as disclosed in the Prospectus;

(m) The Company has not violated any applicable law or regulation relating to
the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws") other than defaults which, individually or in the aggregate would
not have a material adverse effect on the shareholders' equity, the
condition (financial or otherwise), the business, management, properties,
assets, rights or operations of the Company and its subsidiaries, taken as
one enterprise; and has all material permits, licenses franchises and
authorizations of governmental or regulatory authorities, under any
applicable Environmental Laws, as are necessary to own, lease and operate
its respective properties and to conduct its business in the manner
described in the Prospectus, except where the absence of such permit would
not have a material adverse effect;

(n) The Company maintains a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with U.S GAAP accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences;

(o) To the best of its knowledge the Company is of the opinion that it carries,
or is covered by, insurance in such amounts and covering such risks as is
reasonably adequate for the conduct of its business as it is presently
being conducted and the value of its properties or as is customary for
companies engaged in similar industries;

(p) Other than as described in the Prospectus no stamp or other issuance or
transfer taxes or duties and no capital gains, income, withholding or other
taxes are payable by or on behalf of the Managers to the Kingdom of Belgium
or to any political subdivision or taxing authority thereof or therein in
connection with the sale and delivery by the Managers of the Shares to the
initial purchasers thereof;

(q) No material labour problem exists with its employees or, to the Company's
knowledge is imminent that could materially adversely affect the Company,
and the Company is not aware of any existing or imminent labour disturbance
by the employees of the Company or any of its subsidiaries and has not been
notified of any existing material labour problems with any of its principal
suppliers, contractors or customers that could reasonably be expected to
result in a material adverse change in the earnings, business, management,
properties, assets, rights, operations or condition (financial or
otherwise) of the Company;

(r) Except as described in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or such
subsidiary, could

13
<PAGE>

reasonably be expected individually or in the aggregate to have a material
adverse effect on the shareholders' equity, the condition (financial or
otherwise), the business, management, properties, assets, rights,
operations or condition (financial or otherwise) of the Company and its
subsidiaries, taken as one enterprise; and other than as set forth in the
Prospectus, the Company and its subsidiaries, have not received any
notifications which indicate that such proceedings are threatened by
governmental authorities or threatened by others;

(s) The Prospectus contains consolidated financial statements of the Company,
prepared in accordance with US generally accepted accounting standards.
The respective accounting standards were consistently applied and present
fairly the position of the Company as of the dates, and the results of
operations and cash flows of the Company for the periods indicated in the
Prospectus and (i) except as disclosed in the Prospectus, there has been no
material adverse change, nor any development or event that is likely to
result in a prospective material adverse change in the condition (financial
or otherwise), business, management, properties, assets, rights, results of
operations or shareholders' equity of the Company and its subsidiaries
taken as one enterprise, and (ii) there has been no distribution of any
kind declared, paid or made by the Company on its Shares;

(t) There is at present no material discussion with any competent tax authority
in relation to the contents of any tax declaration made by the Company or
any of its subsidiaries, which individually or in the aggregate would have
a material adverse effect on the shareholders' equity, the condition
(financial or otherwise), the business, management, properties, assets,
rights, operations or condition (financial or otherwise) of the Company and
its subsidiaries, taken as one enterprise;

(u) There is at present no material discussion with any social security
authority in relation to the contents of any declaration made by the
Company or any of its subsidiaries, which individually or in the aggregate
would have a material adverse effect on the shareholders' equity, the
condition (financial or otherwise), the business, management, properties,
assets, rights or operations of the Company and its subsidiaries, taken as
one enterprise.

BY THE SELLING SHAREHOLDER :

The Selling Shareholder represents and warrants to each of the Managers as
follows:

(a) The Selling Shareholder is the lawful owner of, and has and at the Closing
Date will have exclusive title to, the Common Stock represented by the
Shares to be sold by the Selling Shareholder pursuant to this Agreement,
free and clear of any liens, encumbrances, equities and claims, and the
Selling Shareholder has full right, power and authority to effect the sale
and delivery of such Shares; and upon the delivery of, the Shares pursuant
to this Agreement, the BBL as representative of the managers will acquire
exclusive title thereto, free and clear of any liens, encumbrances,
equities and claims;

(b) The Selling Shareholder has full right power and authority to execute and
deliver this Agreement, and to perform its obligations under such agreement
and such agreement constitute valid and legally binding agreements of the
Selling Shareholder enforceable in accordance with their respective terms.
The execution and delivery of this Agreement and of the sale to BBL as

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<PAGE>

representative of the Managers of the Shareholder's Shares transactions
herein contemplated and the fulfilment by the Selling Shareholder of the
terms in respect hereof will not require any consent, approval,
authorization, or other order of any court, regulatory body, administrative
agency or other governmental body and will not result in a breach of any of
the terms and provisions of, or constitute a default under, the
organizational documents of the Selling Shareholder, if not an individual,
or any indenture, mortgage, deed of trust or other agreement or instrument
to which the Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction over
the Selling Shareholder or its assets;

(c) The information in the Prospectus which specifically relates to the Selling
Shareholder, is a summary complete and accurate in all material respects
and does not as of the date of the Prospectus and on the Closing Date,
contains any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading.

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<PAGE>

ANNEX II

COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDER

COVENANTS OF THE COMPANY

The company covenants and agrees with the several Managers that:

(a) The Company shall respect the 'Continuing Obligations' as described in
Chapter IV of the EASDAQ rules as may be amended from time to time.
Furthermore the Company will, for a period of five years from the Closing
Date, deliver to the Managers copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with EASDAQ or any other securities exchange where
the Shares of the Company are listed pursuant to the requirements of such
exchange;

(b) Except as provided for in the Certificate of Incorporation the Company will
not take, directly or indirectly, any action designed to cause or result
in, or that has constituted or might reasonably be expected to constitute,
the manipulation of the price of any securities of the Company.

COVENANTS OF THE SELLING SHAREHOLDER

The Selling Shareholder covenants and agrees with the several Managers that:

(a) The Selling Shareholder will comply with the restrictions provided in the
articles of association of the Company;

(b) The Selling Shareholder will not take, directly or indirectly, any action
designed to cause or result in, or that might reasonably be expected to
constitute, the manipulation of the price of any securities of the Company.

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<PAGE>

ANNEX III

INDEMNIFICATION PROVISIONS

(a) The Company will indemnify and hold harmless each Manager against any
losses, claims, damages or liabilities, joint or several, to which such Manager
may become subject, under the Securities Act of 1933 (the "Act") or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each Manager for
any legal or other expenses reasonably incurred by such Manager in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement in or omission or alleged omission from any such documents in
reliance upon and in conformity with written information furnished to the
Company by any Manager through BBL expressly for the use therein.

(b) The Selling Shareholder will indemnify and hold harmless each Manager
against any losses, claims, damages or liabilities, joint or several, to which
such Manager may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact concerning the Selling Shareholder contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact concerning the Selling
Shareholder required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Manager for any legal or other
expenses reasonably incurred by such Manager in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Selling Shareholder will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
in or omission or alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the Company by any
Manager through BBL specifically for use therein. Notwithstanding the foregoing,
the Selling Shareholder's indemnity of the Manager will be limited to that
amount of proceeds received by the Selling Shareholder from the Transaction.

(c) Each Manager will severally and not jointly indemnify and hold
harmless the Company and the Selling Shareholder against any losses, claims,
damages or liabilities to which the Company or the Selling Shareholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent,

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<PAGE>

but only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Manager through BBL
specifically for use therein, and will reimburse any legal or other expenses
reasonably incurred by the Company and the Selling Shareholder in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred. Notwithstanding the foregoing, each
Manager's indemnity of the Company and the Selling Shareholder will be limited
to 100% of the fees payable to each such Manager with respect to the
Transaction.

(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, expect with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; PROVIDED, HOWEVER,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then separate counsel
chosen by the indemnified party or parties shall be entitled to conduct the
defense to the extent reasonably determined by such counsel to be necessary to
protect the interests of the indemnified party or parties and (ii) in any event,
the indemnified party or parties shall be entitled to have counsel chosen by
such indemnified party or parties to participate in, but not conduct, the
defense, however, in no event shall the indemnifying parties be obligated to pay
for more than one firm of attorneys and one local counsel in each appropriate
jurisdiction for all of the indemnified parties. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action. Notwithstanding the foregoing, each
Manager's indemnity of the Company and the Selling Shareholder will be limited
to 100% of the fees payable to each such Manager with respect to the
Transaction.

(e) The indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholder

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<PAGE>

on the one hand and the Managers on the other from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Selling Shareholder on the one hand and the Managers on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholder on the one hand and the Managers on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholder bear to
the total underwriting fees received by the Managers. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by the Selling
Shareholder or the Managers and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of this
subsection (e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim which is the subject of this subsection (e). No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Managers' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.

(f) The obligations of the Company and the Selling Shareholder under this
Section shall be in addition to any liability which the Company or the Selling
Shareholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Manager within the meaning
of the Act; and the obligations of the Managers under this Section shall be in
addition to any liability which the respective Managers may otherwise have and
shall extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration Statement
and to each person, if any, who controls the Company within the meaning of the
Act. Notwithstanding the provisions of this subsection (e), no Manager shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Manager has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.

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<PAGE>

ANNEX IV

FORM OF LEGAL OPINION FROM US COUNSEL

(i) The Company and each of [LIST OF US SUBSIDIARIES] (the "US
Subsidiaries") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease
its properties and conduct its business as described in the
Registration Statement and the Prospectus. All the issued and
outstanding voting stock of the Company and its US Subsidiaries has
been duly authorized and validly issued and is fully paid and
non-assessable. The voting stock of the US subsidiaries is held of
record by and to such counsel's knowledge owned by the Company. To the
best of such counsel's knowledge, except to what is described in the
Registration Statement and the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into such shares of voting
stock of the Company or the US Subsidiaries are outstanding.

(ii) The Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or
suspending or preventing the use of the Prospectus is in effect and no
proceedings for that purpose have been instituted or are pending or
contemplated by the Commission.

(iii) The Registration Statement (except as to the financial statements and
schedules and other financial data contained therein, as to which such
counsel need express no opinion) complies as to form in all material
respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder.

(iv) To the best of our knowledge no franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the
opinion of such counsel are of a character required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement which are not described and filed as
required.

(v) The issue and sale by the Company of the Shares sold by the Company, as
contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, any Material Contract or any applicable United
States law or regulation, or so far as is known to such counsel, any
order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality.

For the purpose of this opinion, "Material Contract" means all
indentures, mortgages, deeds of trust, loan agreements, bonds,
debentures, note agreements, leases, contracts and other agreements,
instruments and evidences of indebtedness which were filed as exhibits
to the Registration Statement which have been certified to us by the
Company as being all of the indentures, mortgages, deeds of trust, loan
agreements, bonds, debentures, note agreements, leases, contracts and
other agreements, instruments and

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<PAGE>

evidences of indebtedness material to the Company to which the Company
is a party or by which any of their properties or assets are bound.

(vi) No consent, approval, authorization or order of any United States court
or United States governmental agency or body is required for the
consummation of the transactions contemplated in the Underwriting
Agreement except such as have been obtained under the Securities Act
and such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Offered Shares by
the Managers.

(vii) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.

(viii) The Selling Shareholder is the owner of record of the Shareholder
Offered Shares and has full legal right and authority to sell, transfer
and deliver in the manner provided in the Underwriting Agreement the
Shareholder Offered Shares. Upon delivery on behalf of the Selling
Stockholder to the Underwriters of certificates for the Shareholder
Offered Shares against payment therefor as provided in the Underwriting
Agreement, the Underwriters will acquire all the rights of the Selling
Stockholder to the Shareholder Offered Shares and will acquire the
Shareholder Offered Shares free and clear of any "adverse claim" (as
such term is used in Section 8201 of the Uniform Commercial Code as in
effect in the State of California), assuming the Underwriters acquire
the Shareholder Offered Shares in good faith and without notice of any
such "adverse claim".

(ix) The Company has full legal right and authority to enter into the
Underwriting Agreement and to sell, transfer and deliver in the manner
provided in the Underwriting Agreement the Shares sold by it
thereunder.

We hereby advise you that we have participated in the preparation of the
Registration Statement and the Prospectus, including participants in conferences
with officers and representatives of the Company and with its independent public
accountants, and with the Managers' counsel, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed, and while we have not independently verified the accuracy or
completeness of the statements contained in the Registration Statement or the
Prospectus except as necessary to render the opinions provided above and we have
not made any investigation or analysis with respect to the financial statements
or other financial information included in the Registration Statement or the
Prospectus, no facts have come to our attention which would give us reason to
believe that the Registration Statement, at the time the Registration Statement
became effective, contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, at the time the
Registration Statement became effective and at the date hereof, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.

As to various questions of fact material to our opinion, we have relied, without
independent investigation or verification, upon the statements, representations
and warranties of the various parties contained in the above-listed documents,
which we

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<PAGE>

have assumed to be true and accurate, and upon statements of officers of the
Company contained in certificates (the "Officers' Certificates") delivered to us
by the Company, which we believe to be correct and copies of which are attached.

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2 of
our report dated February 5, 1999, except for subsequent events described in
Note 19, as to which the date is March 18, 1999, on our audits of the financial
statements of Dental/Medical Diagnostic Systems, Inc. as of December 31, 1998
and 1997 and for the years ended December 31, 1998 and 1997 and for the ten
month period ended December 31, 1996. We also consent to the references to our
firm under the caption "Experts".

/s/ PricewaterhouseCoopers LLP

Woodland Hills, California
April 23, 1999